Starting March 11, 2024, a new ruling from the Department of Labor (DOL) regarding the independent contractor classification status becomes effective. This new ruling raises the bar for classifying workers as independent contractors instead of classifying them as regular employees.
This new ruling applies to all employers currently working with independent contractors, or those considering whether or not to work with independent contractors in the future.
How This New Ruling May Impact Employers
The ruling, titled RIN 1235-AA43, seeks to establish new guidelines to be used when determining whether the proper classification of a worker is an independent contractor or whether they would be more accurately classified as a regular employee (exempt or nonexempt) as defined by the Fair Labor Standards Act (FLSA).
The most notable change is that the new ruling eliminates the 2021 ruling that established a five-factor “core factors” test and replaces it with the new six-factor, “non-exhaustive” test. While the previous five-factor model places more weight on some of the “core factors,” the new six-factor model places weight equally on all of the potential considerations.
The DOL goes on to state that there may be more than six-factors and will potentially look at other considerations, if warranted by the situation. The DOL’s focus is on all of the relevant “economic realities” of the situation, not the clear-cut application of only the six-factors.
How to Determine if a Worker is an Independent Contractor or an Employee
The primary focus of this new ruling is on whether or not the worker is economically dependent on the employer or whether they are in business for themselves. The DOL will look at this, “non-exhaustive” six-factor list:
- 1. The degree to which the employer controls work and the working relationship.
- Sample questions to help assess this factor may include:
- Who assigns and schedules the scope of work to be done?
- What is the extent of supervision by the employer? (The DOL notes that it does not matter if the supervision is in-person or through a remote-based medium.)
- Is the worker bound by exclusivity or do they independently contract with other employers as well?
- If the worker sets the price, may come and go as they please, and engages with other employers during the course of their work, then the DOL may be more inclined to determine they are properly classified as an independent contractor.
- Sample questions to help assess this factor may include:
- 2. The worker’s opportunity for profit or loss based on managerial skill and investment.
- Sample questions to help assess this factor may include:
- Who sets the terms (price or rate) for work in exchange for compensation?
- Is the worker able to hire and manage other workers?
- Does the worker implement an advertising strategy?
- While this factor may be slightly up to interpretation, it is the DOL’s attempt to ascertain whether or not the worker has an opportunity to express control over factors related to operating a business or does the employer make these decisions. If the worker has the opportunity for greater amounts of profit or loss based on their own skills and ingenuity, the DOL may be more inclined to determine they are properly classified as an independent contractor.
- Sample questions to help assess this factor may include:
- 3. The amount of skill and initiative required for work performed.
- Sample questions to help assess this factor may include:
- Does the worker exercise independence in determining the application of skills?
- Does the worker determine the marketing and use of the worker’s skills?
- Of course, the worker has valuable skills, but the focus is on whether the worker or the employer decides how to apply those skills, or decides which skills to apply within a given situation. If the worker makes those decisions and demonstrates entrepreneurial judgment, the DOL may be more inclined to determine they are properly classified as an independent contractor.
- Sample questions to help assess this factor may include:
- 4. The degree of permanence of the working relationship.
- Sample questions to help assess this factor may include:
- Is the work long-term, predictable, and/or exclusive?
- Is the worker able to turn down work, and offer that work to others?
- This is quite similar to what was already established within the DOL’s previous five-factor ruling from 2021. If the working relationship is short-term, for a specific project, and the worker may come and go as they please, the DOL may be more inclined to determine they are properly classified as an independent contractor.
- Furthermore, the DOL cites that seasonal and temporary work does not correlate with independent contractor status if that type of short-term work is characteristic of the business or industry.
- Sample questions to help assess this factor may include:
- 5. The extent to which the work is integral to the employer’s business.
- Sample questions to help assess this factor may include:
- Is the work integral (critical, necessary, or central) to the employer’s primary business (e.g., harvester on a farm, assembly line worker in a manufacturing plant)?
- If the work is peripheral or supportive of the employer’s business (e.g., consultant, accountant for a non-accounting related organization, etc.), then the DOL may be more inclined to determine they are properly classified as an independent contractor.
- Sample questions to help assess this factor may include:
- 6. The worker’s investment in equipment or materials.
- Sample questions to help assess this factor may include:
- Are tools, supplies, and/or the location the employer’s, rented, or the independent contractor’s property?
- If the worker decides which tools and supplies are necessary for a greater level of productivity and purchases them and/or rents and operates from their own worksite, then the DOL may be more inclined to determine they are properly classified as an independent contractor.
- Furthermore, the DOL noted the focus is not on a particular dollar amount, but rather, they will look at whether or not the types of investments made by the worker are the same types of investments that are typically associated with running a business.
- Sample questions to help assess this factor may include:
As stated above, the DOL notes that these six-factors are a “non-exhaustive” list of factors and there may be other factors the DOL may review as they consider the proper classification of workers within specific situations.
In addition to the DOL taking a higher level of interest in the classification, or misclassification, of independent contractors, the National Labor Relationships Board (NLRB) is also taking a look at this topic, primarily as it relates to unfair labor practices, further adding to the pressure employers are facing when working to ensure workers are classified correctly.
Summary
Effective March 11, 2024, the DOL introduces a pivotal ruling impacting the classification of independent contractors versus regular employees. Applicable to all employers, especially those with established long-term relationships with independent contractors, the ruling replaces the previous five-factor model with a comprehensive six-factor, “non-exhaustive” test with a focus on the economic realities of the worker’s situation and the degree to which the situation allows for the worker to express an entrepreneurial nature.
Prior to March, it would be prudent for employers who utilize independent contractors to review these relationships and adapt, if necessary, to these changes to ensure accurate worker classification, as the DOL and the NLRB intensify scrutiny on this matter.
For additional information regarding independent contractor status and the FLSA classification of workers, please read our previously published articles titled, “Are Your Employees Classified Correctly?” (click here), and “Do Employers Truly Understand the Fair Labor Standards Act (FLSA)?” Part I (click here) and Part II (click here), or contact us at NewFocusHR.com.
Updated by: Jason Love, SHRM-CP, CLSSGB
HR Consultant
2/15/2024
Sources:
- “Employee or Independent Contractor Classification Under the Fair Labor Standards Act”, Department of Labor – Wage and Hour Division, 1/10/2024 (click here)
- Department Of Labor Publishes Final Independent Contractor Rule, Set To Be Effective March 11, 2024, Barnes & Thornburg, 1/18/2024 (click here)
