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Ask the Expert: The New Rule for Independent Contractors – Are You Ready?

Effective March 11, 2024, the US Department of Labor will change the analysis it uses to determine whether an individual is an employee or independent contractor under the Fair Labor Standards Act.  This change reflects the Department's intention to strengthen worker protection. 

When announcing the new rule, Acting Secretary of Labor Julie Su stated, “Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections… This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.”

Background

The federal government and each state have their own rules to analyze whether an individual is an independent contractor or an employee of a company.  Worker classification is a common issue in federal and state Department of Labor audits and failure to properly classify a worker may result in significant expenses to a company, including payments of additional wages and penalties.

In 2021, the US Department of Labor changed the analysis for worker classification, moving away from a traditional multifactor test to a two “core” factors test (2021 Independent Contractor Rule).  The two factor test was viewed as a business friendly test which was less stringent than the traditional multifactor test it replaced.  However, effective March 11, 2024, the 2021 Independent Contractor Rule will be replaced with a six factor test that examines the “economic realties” of the relationship between a business (potential employer) and an individual.

New Independent Contractor Rule

The new US Department of Labor Rule identifies the following six factors it will use to determine if a company has properly classified an individual: (1) Opportunity for profit or loss depending on managerial skill; (2) Investments by the worker and the employer; (3) Degree of permanence of the work relationship; (4) Nature and degree of control; (5) Extent to which the work performed is an integral part of the employer’s business; and (6) Skill and initiative.

Business will need to pay close attention to Department’s interpretation and application of the six factors under the new 2024 Rule which at times differ from prior applications.  By way of example, in order to satisfy the second factor of the 2024 Rule, less consideration will be placed on the investment of an independent contractor’s tools and equipment, particularly if the investment/tools are required by statute or a company.  Instead, the Department will be looking for investment which “serves a business-like function, such as increasing the worker's ability to do different types of or more work”.   

What Should You Consider?

As a takeaway from this new rule, businesses should consider re-examining their relationships with independent contractors, including written agreements, documents used, and work provided.  Also, businesses should be mindful of the shift on a federal level.  The National Labor Relations Board recently revised its rule to determine joint employment, which was viewed as a pro-employee change.  The US Department of Labor has also announced revisions to the Fair Labor Standards Act “restoring and extending overtime protections”.