Federal Independent Contractor Regulations Updated!
We’ve been hearing for a while that the U.S. Department of Labor was going to update regulations regarding independent contractor status…and now it’s happened!
What are the new Rules and when are they effective?
Earlier in January 2024, the Department of Labor published a final rule (which is effective March 11, 2024) that rescinds the 2021 rule in regard to defining the term “independent contractor”. We now have a six-factor “economic realities” test as follows:
- Factor #1: Opportunity for Profit or Loss Depending on Managerial Skill
- Factor #2: Investments by the Worker and the Potential Employer
- Factor #3: Degree of Permanence of the Work Relationship
- Factor #4: Nature and Degree of Control
- Factor #5: Extent to Which the Work Performed is an Integral Part of the Potential Employer’s Business
- Factor #6: Skill and Initiative
How different is the new rule from the previous rule?
In simple terms, you have more factors to consider that need to be more evenly weighed. Previously under the Trump Administration, there were five factors, with two of them being “core factors”.
How do I best assess the six factors?
We recommend consulting the DOL’s Small Entity Compliance Guide closely! The Guide is a wealth of information. To set the stage, the Guide first states “There is no single rule for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. Rather, an “economic reality test” looks to the facts of a situation, rather than assuming that a written label, contractual arrangement, or form of business decides if a worker is economically dependent on an employer.”
So, let’s dive into those six factors. The Guide discusses each of the six factors in detail; it also includes several questions to consider and specific examples. When reviewing the first factor regarding profit or loss, the Guide explains “Does the worker have opportunities for profit or loss based on managerial skill that affect the worker’s economic success or failure? Managerial skill can include initiative or business expertise or judgment.” It provides some questions to consider, including but not limited to “whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work.” It then states, “If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee.” This type of detail and guidance is included for factors two through six as well.
The DOL Guide is very comprehensive and we encourage any employer who is assessing whether an individual is an employee or an independent contractor to review the Guide carefully.
What if I misclassify an employee as an independent contractor?
In a situation where an individual was inappropriately considered an independent contractor when they should have been classified as (and treated as) an employee, a company can face penalties related to unpaid overtime, minimum wage, damages and attorney fees. Intentional misclassification can potentially result in criminal charges.
What to do now?
If you have individuals classified as independent contractors, we encourage you to review their roles under this new six-factor test. As a reminder, there is no single rule or test, you must assess the totality of the circumstances of the six factors. If you find a relationship does not meet the six factors, we recommend reaching out to legal support and/or HRT to discuss how the individual should be transitioned to an employee classification.
HRT Northwest: Your HRT Northwest Team
Seattle: (253) 642-7372 | info@hrtnorthwest.com
This Update is not a full overview of all recent or upcoming legal changes. HRT Northwest is staffed by professionals in the field of Human Resources and business management. We are glad to help with your HR needs; however, we do not offer legal advice and our services are not a substitute for the help of a qualified attorney.