U.S. Department of Labor updates rules for independent contractors

Effective March 11, 2024, the analysis rules for determining independent contractor status were modified. The U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) claims the modifications are more consistent with judicial precedent and the Fair Labor Standards Act’s (FLSA’s) purpose than the 2021 rule issued during the Trump Administration.

The modifications to the analysis rules are intended to help employers better understand when a worker qualifies as an independent contractor. The misclassification of an employee as an independent contractor can negatively impact both the individual and the employer. The individual may not receive the minimum wage and overtime pay to which they are entitled and they may also be denied other benefits and protections under the law that an employee is eligible for. Additionally, the employer responsible for the misclassification of workers may be subject to significant penalties. Penalties can include fines for failing to properly file Form W-2, withholding taxes and paying matching FICA taxes.

Employers who misclassify workers may face additional consequences such as civil fines, criminal penalties, debarment from government contracts and court orders. Penalties can be particularly harsh if it is determined that the misclassification was intentional.

The updated rule restores a multi-factor analysis, analyzing all relevant factors to determine an employee’s status. This six-factor economic reality test contains no safe harbor for classifying a worker as an independent contractor. The new rule states that a temporary work relationship, the worker’s investment in tools and equipment to perform the job and the worker’s specialized skills don’t necessarily qualify the worker as an independent contractor.

The six-factor economic reality test considers the following:

1. The worker’s opportunity for profit or loss
2. The worker’s investments compared with the business’s investments
3. Permanency of the work relationship
4. The nature and degree of control over performance of the work and working relationship
5. Whether the work is an integral part of the business
6. The criticality and uniqueness of the worker’s skill and business initiative

It is also important for employers to understand that no single factor carries more weight than another. The updated 2024 rule requires employers to look at the worker’s status in totality. Facts that may be relevant under this new test include whether workers can set or negotiate the rate for services they provide and workers’ ability to work elsewhere.