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Department of Labor (DOL) New Independent Contractor Rule
Jan 24, 2024 10:26:15 AM
On January 9, 2024, the U.S. Department of Labor announced a final rule revising the Department’s guidance on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA), which will be effective on March 11, 2024. The final rule repeals the Independent Contractor Status Under the Fair Labor Standards Act rule (2021 IC Rule), which was published in 2021, replacing it with an analysis for determining employee or independent contractor status that is more consistent with the FLSA as interpreted by longstanding judicial precedent.
The misclassification of employees as independent contractors can deny workers minimum wage, overtime pay, and other protections. This final rule reduces the risk that employees are misclassified as independent contractors while also providing a consistent approach for businesses that engage with individuals who are in business for themselves.
Legally speaking, the new rule is not especially significant. For one thing, it's the courts, not regulatory agencies like the DOL, that have the final say over who qualifies as an independent contractor. Moreover, the DOL's rule is limited to only one law - the FLSA. There are different tests for independent contractor status under several other federal statutes, including the Employee Retirement Income Security Act (ERISA), the National Labor Relations Act (NLRA) and the Internal Revenue Code. Furthermore, each state has its own set of laws governing independent contractor classification that an employer should be mindful of. This new rule could inspire a rise in worker lawsuits. However, business groups are working to try to stop the new rule.
Under the new rule, the DOL will consider six factors when examining the relationship between a potential employer and workers.
These factors are:
- The degree of permanence of the work relationship.
- The nature and degree of control over the performance of the work.
- The worker’s opportunity for profit or loss.
- The use of the worker’s skill and initiative.
- Investments made by the worker and the employer.
- The extent to which the work performed is an integral part of the employer’s business.
This final rule overturns the 2021 rule where two core factors—control over the work and opportunity for profit or loss—carried a greater weight for determining the statuses of independent contractors. Under this new rule, employers will use a totality-of-the-circumstances analysis, where none of the factors carry a greater weight than others.
The rule was published in the Federal Register on Wednesday, January 10, and is slated to take effect March 11, with the DOL planning to release further guidance to help employers stay in compliance with this rule.
There is an option to pursue an IRS ruling on final determination if an employer is unsure of their worker status. Employers and workers can file Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding to get a determination from the IRS as to whether or not a worker is an independent contractor. This form can be found at: https://www.irs.gov/pub/irs-pdf/fss8.pdf.
If an employer is having doubts about whether or not a worker can be classified as an independent contractor or should be an employee, the most conservative approach would be to classify as an employee and comply with applicable laws. When in doubt, play it safe.
