U.S. Department of Labor issues a Contractor Final Rule
The U.S. Department of Labor (DOL) released a final rule January 9, 2024, that changes the criteria for classifying independent contractors.
The final rule largely mirrors the DOL’s proposed rule and requires companies to weigh a variety of economic factors to determine whether a worker is an employee or an independent contractor.
The final rule has major ramifications for the gig economy, because app-based platforms have typically classified their delivery drivers and other gig workers as independent contractors. Freelance workers or consultants such as writers, musicians, IT professionals, trainers and other people whose work is project-based may be similarly affected.
Under the federal Fair Labor Standards Act (FLSA), employees are entitled to minimum wage, overtime pay and other benefits. Independent contractors are not entitled to such benefits, but they generally have more flexibility to set their own schedules and work for multiple companies.
“Misclassified employees don’t get paid for all their hours,” Su said. “They see their economic security eroded because of misclassification. This rule provides greater clarity and consistency in determining a worker’s status.”
The final rule rescinds a 2021 rule in which two core factors—control over the work and opportunity for profit or loss—carried greater weight in determining the status of independent contractors. Under the new rule, employers would use a totality-of-the-circumstances analysis, in which none of the factors carry greater weight.
The new test includes six factors:
- The degree to which the employer controls how the work is done.
- The worker’s opportunity for profit or loss.
- The amount of skill and initiative required for the work.
- The degree of permanence of the working relationship.
- The worker’s investment in equipment or materials required for the task.
- The extent to which the service rendered is an integral part of the employer’s business.
“No factor or set of factors has a predetermined weight, and a totality of the circumstances of the working relationship must be considered, the six factors are not exhaustive, nor are any of them more important than any others.” ~Jessica Looman, Administrator, Department of Labors Wage and Hour Division.
There are steps you as an employer can take to help mitigate any damages that might come from misclassifying a contractor with a regular employee.
To start, all employers should have class-action waivers in all arbitration agreements that they use with independent contractor contracts. Additionally, you should review the worker classifications within the 1099 tax agreement to confirm you are using the correct tax code. Both of these are areas that Scot Candell & Associates can help.
