On January 10, 2024, the U.S. Department of Labor (“DOL”) published its highly anticipated final rule on independent contractor classification in the Federal Register. The new rule, effective March 11, 2024, rolls back Trump-era changes and provides several important clarifications. Employers throughout the U.S. must take note.
The employee vs. independent contractor distinction is especially important for employers to understand because employees are entitled to benefits including minimum wage, overtime, income tax withholding, the employer portion of social security tax, unemployment insurance, and workers’ compensation coverage (including employer contributions), as well as the full range of employee benefits, such as paid vacations, sick time, 401k/retirement benefits and employment discrimination protection. Independent contractors are not so protected.
The new rule rolls back major Trump-era changes to the DOL’s analysis when determining employee or independent contractor status. Traditionally, the DOL and many states courts would consider six factors when analyzing independent contractor vs. employee status. In early 2021, the Trump administration issued a rule that reduced the number of factors that the DOL would consider to two. The new rule rescinds the 2021 rule and returns to an updated six-factor analysis.
The six factors to be considered under the new rule are as follows:
- Opportunity for profit or loss depending on managerial skill. Employers should consider “whether the worker has opportunities for profit or loss based on managerial skill (including initiative or business acumen or judgment) that affect the worker’s economic success or failure in performing the work. If not, “this factor suggests that the worker is an employee.”
- Investments by the worker and the potential employer. “Investments that are capital or entrepreneurial in nature and thus indicate independent contractor status generally support an independent business and serve a business-like function, such as increasing the worker's ability to do different types of or more work, reducing costs, or extending market reach.” Conversely, “Costs to a worker of tools and equipment to perform a specific job, costs of workers' labor, and costs that the potential employer imposes unilaterally on the worker…are not evidence of capital or entrepreneurial investment and indicate employee status.”
- Degree of permanence of the relationship. This factor “weighs in favor of the worker being an employee when the work relationship is indefinite in duration or continuous, which is often the case in exclusive working relationships.” Conversely, this factor “weighs in favor of the worker being an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities.”
- Nature and degree of control. Factors that determine whether the employer exerts control over the worker include “whether the potential employer sets the worker's schedule, supervises the performance of the work, or explicitly limits the worker's ability to work for others.” These and other factors must be weighed in the balance: “More indicia of control by the potential employer favors employee status; more indicia of control by the worker favors independent contractor status.”
- Extent to which the work performed is an integral part of the potential employer’s business. This factor considers whether the work is “critical, necessary, or central to the employer's principal business.”
- Skill and initiative. This factor considers “whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative.” Employee status is indicated “where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the employer to perform the work.” On the other hand, “Where the worker brings specialized skills to the work relationship, it is the worker's use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.”
The factor list is rounded out by a seventh numbered item, “Additional Factors,” which “may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the employer for work.”
What Businesses Need to Know Going Forward
Employers need to weigh these factors and determine, by March 11, 2024, whether the individuals they engage are “employees” or “independent contractors.” This determination affects important issues of employer taxation responsibility, employee benefit eligibility, and employment discrimination coverage.
Please contact us if you or your business needs any assistance or information with respect to this rule or classification of those who perform work for your business or organization.