Independent Contractor vs. Employee: What the 2025 Changes Mean for Yacht Crew
By McGregor Financial Services
(Updated 2025 — with references to U.S. Department of Labor, IRS, and MLC)
For yacht crew ; deckhands, engineers, stews, chefs, captains—the question of classification (1099 independent contractor vs. W-2 employee) is more than paperwork. It determines taxation, liability, benefits, and even how audits play out.
In 2025, the U.S. Department of Labor (DOL) and IRS both issued updates impacting how worker classification is assessed. At the same time, many yachts operate under “MLC-compliant” contracts, which can create confusion about whether international standards shield crew from U.S. obligations.
This article explains:
The DOL’s 2025 rollback of the contractor rule
IRS classification rules and recent updates
The role of the Maritime Labour Convention (MLC)
Why this matters in the yachting industry
Practical steps for owners, managers, and crew
1. The DOL’s 2025 Shift in Enforcement
2024 Rule Put on Hold
On May 1, 2025, the DOL issued Field Assistance Bulletin No. 2025-1, announcing that it will not apply the 2024 independent contractor rule in wage-and-hour investigations. Instead, it reverts to earlier guidance: Fact Sheet #13 (2008) and Opinion Letter FLSA2019-6, both based on the long-standing “economic reality” test (dol.gov).
Key points:
The 2024 rule technically remains in place for private litigation, but the DOL itself will not use it in enforcement.
The agency is reconsidering whether to revise or rescind the rule entirely.
Employers have slightly more flexibility, but misclassification is still a serious compliance risk.
2. IRS Rules and Updates
Unlike the DOL, the IRS focuses on tax withholding, Social Security, Medicare, and unemployment taxes. Its guidance remains strict:
Employees perform services under the employer’s control (what, when, how).
Independent contractors control how they work, supply tools, bear risk, and often serve multiple clients (IRS.gov).
The IRS examines:
Behavioral control (instructions, training)
Financial control (who provides tools, risk of profit/loss)
Relationship factors (permanency, benefits, integral role)
In February 2025, the IRS updated its rules through Revenue Procedure 2025-10, revising how § 530 relief applies to businesses that misclassify workers. It also highlighted the Voluntary Classification Settlement Program (VCSP) as a path to reclassify workers with reduced penalties (IRS.gov).
Bottom line: Even if the DOL is easing off, the IRS still enforces worker status aggressively.
3. The MLC: What It Does (and Doesn’t) Cover
The Maritime Labour Convention, 2006 (MLC)—ratified by most major flag states—sets minimum global standards for seafarer employment. It requires:
Written contracts of employment
Standards for hours of work and rest
Repatriation rights
Payment of wages and onboard conditions
While vital for crew protections, the MLC does not regulate taxation.
Being “MLC compliant” does not exempt U.S. citizens from IRS worldwide income taxation.
Crew under MLC contracts may still be reclassified as employees under U.S. law if the facts support it.
For yacht owners and management companies, relying solely on “MLC compliance” does not protect against IRS or DOL enforcement.
In short: MLC is about fair working conditions. U.S. tax and labor authorities still decide whether someone is a contractor or employee.
4. Why This Matters in Yachting
Offshore Flags and Entities Don’t Eliminate Risk
Yachts often operate under Marshall Islands, Cayman Islands, or other offshore entities. While these structures may provide liability or ownership advantages, they do not override U.S. tax law for U.S. citizens or resident crew.
High Levels of Control Push Toward “Employee”
Crew are usually:
Directed daily by a captain or owner
Using yacht-owned tools, uniforms, and equipment
Essential to operations like navigation, safety, and guest services
Retained long-term rather than hired for one-off projects
These are strong indicators of employee status.
Real-World Impact
Owners/managers who misclassify risk back taxes, penalties, and liability.
Crew treated as contractors may miss protections (workers’ comp, overtime, unemployment).
Audits can force retroactive payroll adjustments — a financial storm for both sides.
5. Action Steps for Yacht Owners, Managers, and Crew
Review contracts: Does the relationship reflect the actual work dynamic?
Document independence if treating crew as contractors (tools, multiple clients, business risk).
Use IRS Form SS-8 to request an official determination if unsure.
Audit regularly: crew roles evolve, and classifications may need updating.
Consider VCSP for safe reclassification with reduced penalties.
Educate crew: clarify that MLC protects working conditions, not tax liability.
The 2025 rollback of the DOL’s independent contractor rule creates temporary breathing room, but the IRS remains vigilant. For yacht crew, classification is shaped by the economic reality of the relationship, not the vessel’s flag, offshore entity, or even MLC compliance.
Owners, managers, and crew alike must understand that while MLC ensures fair contracts and conditions, it does not remove U.S. tax obligations. Misclassification is still one of the fastest ways to attract IRS scrutiny — and expensive penalties.
Taking proactive steps now to clarify and document worker status is the best way to keep your yacht operations compliant and avoid unexpected turbulence.