Advisory: DOL Reverses Course on Independent Contractors

A new year brings a change in direction from the U.S. Department of Labor in its recently issued Final Rule regarding classification of workers as either an employee or an independent contractor! Companies that regularly hire and compensate workers as independent contractors are the most likely to be impacted by this rule change… especially those whose workers regularly work more than 40 hours in a week (and thus would be entitled to overtime if in fact deemed to be an employee as opposed to an independent contractor). 

The Final Rule will go into effect on March 11, 2024 , and holds significance for your business, especially in managing your workforce effectively and ensuring compliance with the Fair Labor Standards Act (FLSA).  

As a result of this new rule, businesses should review and reevaluate contracts with independent contractor relationships. 

The new rule introduces specific factors for evaluating whether a worker hired as an independent contractor should in fact be classified as an employee. This six-factor test examines whether a worker is, in the eyes of the law, economically dependent on the company retaining the worker under the “totality of the circumstances” – without emphasis added to any one of the “core” factor(s).  

1. Nature and degree of control: Assessing the level of control the company has over the worker's work, including the freedom to set hours and the ability to work for others. 

1. The worker's opportunity for profit or loss depending on managerial skill: Evaluating whether the worker has the potential for financial gain or loss based on their own initiative or investments. Is the worker able to exercise business judgment that is indicative of independent contractor status?  

1. Amount of skill and initiative required for the work: This factor considers whether the worker brings specialized skills to the relationship or obtains them from the company hiring the workere. 

1. Degree of permanence of the working relationship: Examining if the working relationship is definite in duration, non-exclusive, project-based or sporadic. 

1. Extent of Integration of the worker's services:  Assessing the degree to which the worker's services are integral to the business's overall operations or an independent function or product.  

1. Investments by the worker and the potential employer: This factor is based on whether the worker is investing money in capital (i.e., equipment) or is entrepreneurial and supports a business function like expanding their market base like a potential employer would be doing. 

What types of businesses will be impacted by the change?  

Companies that regularly hire and compensate workers as independent contractors are the most likely to be impacted by this rule change… especially those whose workers regularly work more than 40 hours in a week (and thus would be entitled to overtime if in fact deemed to be an employee).  

Companies that do not classify nor compensate workers as independent contractors will not be impacted by this change. 

What does this mean for your business?   

The rule not only muddies the factors and weighting of factors allowing for clearer cut analysis, but also makes it more difficult for a worker to qualify as an independent contractor rather than an employee. Thus, the risk of potential misclassification will increase, resulting in heightened potential liability for companies that use independent contractors.