The Department of Labor (DOL) has issued a new rule that changes the way businesses classify independent contractors. On March 11, 2024, the new rule will take effect and will make it more difficult for businesses to determine whether someone is an employee or an independent contractor.
What the New Rule Says
DOL’s previous rule gave businesses a straightforward test for distinguishing an independent contractor from an employee—mostly hinging on the worker’s degree of control over his or her work, and the worker’s opportunity for profit or loss.
However, DOL chose to depart from this test, and will apply a “totality-of-the-circumstances” analysis instead. The new rule introduces six factors that are each weighed equally:
What Happens if I Classify a Worker Wrong?
The new factors make it more complicated for business owners to evaluate whether a worker is an independent contractor. The biggest change is that a worker who under the old test would be a contractor must not only have the chance to seek other clients, advertise, etc., but must actually take these steps to grow his or her business. In other words, a contractor who depends on one client may be considered an employee of that client just because he has a small client list and does not engage in advertising.
If workers who were classified as independent contractors under the previous rule are classified as employees under this rule, a small business owner will have to pay these workers minimum wage and overtime. In addition, if an independent contractor is considered an employee, he or she is eligible to start or join a union organizing campaign. With these additional burdens goes an increased risk of legal liability for unpaid overtime and other damages.
How to Avoid Legal Trouble
To reduce the chance of litigation, it’s important that businesses properly classify workers. Here are a few best practices for ensuring compliance with the new rule:
- Review DOL’s Fact Sheet on the rule and see if the listed examples sound like any of your current contractors. If so, consider whether those business relationships should continue;
- Don’t take on a new contractor who could be considered an employee under the new rule;
- Develop policies for managing independent contractor relationships that avoid the situations described by DOL, you can check out the NFIB Guide to Independent Contractors;
- Know if your state has additional rules (for example, an “ABC Test”) that make it harder to classify a worker as an independent contractor; and
- When in doubt, consult an attorney!
For more information, reach out to the NFIB Small Business Legal Center at [email protected].