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:
- Opportunity for profit or loss depending on managerial skill. This factor looks at a variety of decisions made by a worker, including whether the worker negotiates his or her pay, decides to accept or decline work, hires his or her own workers, purchases materials and equipment, or engages in marketing or advertising. If a worker does not take these actions (unless there’s a good business reason not to) he or she may be considered an employee.
- Investments by the worker and the employer. If the worker makes investments to grow his or her business, this weighs in favor of contractor status. However, purchasing tools for particular jobs does not count towards such “investments.”
- Permanence of the work relationship. This factor looks at the nature and length of the business relationship. If it is continuous, lacks a fixed ending date, or is the worker’s only work relationship, the worker may be considered an employee.
- Nature and degree of control. This factor asks whether the potential employer maintains control over hiring, firing, scheduling, prices, pay, etc., and whether the potential employer supervises the worker. This factor will be confusing for businesses to apply as a contractor and employee relationship may look similar in practice when it comes to these basics.
- Whether the work performed is integral to the employer’s business. If someone performs a role that is considered central to the business (i.e. picking tomatoes on a farm) he or she may be considered an employee. For a farm, DOL considers tomato-picking integral and accounting support not integral, but does not explain where other roles between those two extremes might fit. This factor is ripe for wildly different interpretations.
- Skill and initiative. A specialized skill alone (i.e. welding) isn’t enough to set someone apart as an independent contractor—he or she must show “business-like initiative” with that skill. In other words, the person must effectively market his or her skills to be considered an independent contractor.
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].
