What Employers Need to Know About the Department of Labor’s 2024 Independent Contractor Rule

Employers seeking to hire workers as independent contractors must pay close attention to the U.S. Department of Labor’s (the “DOL”) new rule regarding the classification of independent contractors.  The misclassification of a worker as an independent contractor is a common and often expensive mistake for employers. Employers must heed to the DOL’s new rule as it ensures workers who are employees are paid the minimum wage and overtime due to them and avoids the possible penalties and fines an employer may be subject to if they are found to have misclassified workers as independent contractors.

Often, employers misclassify workers as independent contractors when they are actually employees and those employees should receive the benefits associated with being an employee, i.e., overtime, coverage under certain benefits plans, etc. Employers may prefer to engage workers as independent contractors because most federal, state, and local labor laws are not intended to protect independent contractors.  For example, independent contractors are generally  ineligible to receive employee benefits, and independent contractor compensation does not need to be reported on Form W2 and are not subject to tax withholdings.  However, misclassifying employees as independent contractors may result in costly and expensive liabilities, including the payment of back wages, applicable retroactive tax liabilities (which can include both interest and penalties), additional legal fines, and potential costs of litigation (including attorneys’ fees).  Hence, we encourage all employers to review the DOL’s new 2024 independent contractor rule to ensure all decisions to hire workers as independent contractors comply with the new rule as described below.

On January 10, 2024, the DOL, the agency charged with enforcing the federal Fair Labor Standards Act (the “FLSA”), issued a final rule which took effect on March 11, 2024, regarding whether a worker is an independent contractor or employee under the FLSA.  The DOL rescinded it’s 2021 “core factors” independent contract rule that was promulgated under former President Donald Trump, as the 2021 rule often conflicted with established case law and the DOL’s prior guidance issued regarding independent contractor status.  The new 2024 rule returns the test to its historical roots, both at the DOL and in many courts, and provides a six-factor economic reality test to apply in the “totality of the circumstances.”  The six factors include the follow:

1. The worker’s opportunity for profit or loss depending on managerial skill. This factor focuses on the worker’s business skills that affect their economic success or failure, including the ability to negotiate their job pay and/or timing and schedule of their work.  This factor also analyzes whether the worker hires other workers to complete tasks, or rents office space.  If the worker does not have opportunity for profit or loss, this factor weighs heavily in favor of the worker being deemed an employee rather than an independent contractor.
2. Investments by the worker and the potential employer. This factor considers whether any investments by the worker are “entrepreneurial or capital” in nature.  Investments that include costs for tools or equipment to do a job would suggest that the worker is an employee.  However, costs incurred to increase the worker’s ability to perform different types of work, reduce costs, or extend their market reach would likely deem the worker to be an independent contractor.
3. The degree of permanence of the worker’s relationship with the potential employer. This factor refers to whether the worker’s relationship with the potential employer is exclusive or non-exclusive, continuous or sporadic, definite in duration, or project based.  However, short-term or temporary work is not necessarily indicative of a worker being deemed an independent contractor.  The factor focuses on whether worker’s lack of permanence is due to certain operational characteristics that are unique to a particular industry or business and the workers they employ.
4. The nature and degree of the potential employer’s control over the worker. This factor analyzes how much control the worker has over their work performance, supervision, schedule, and the economics of the relationship, including prices or rates.  This factor also looks to whether the worker can work for other businesses (whether that limit is explicitly expressed by the potential employer, or the potential employer places demands on the workers’ time that do not allow them to work for others or work when they choose to work).  The rule also notes that supervision by a potential employer may be imposed through the worker’s use of technology (i.e., remote monitoring or tracking), and does not require there to be direct supervision of the worker.
5. The extent to which the work performed is an integral part of the potential employer’s business. This factor considers whether the work or function performed is central, necessary, or critical to the potential employer’s principal business.  It does not focus on whether the individual worker is an integral part of the business, but rather focuses on whether the function the worker performs is an integral part of the business.
6. Whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. This factor focuses on whether the worker is dependent on training for the business to perform their job function, or whether the worker possess specialized skills and demonstrates an entrepreneurial judgment.  Where the worker’s use of those specialized skills is in connection with business-like initiative, it is more likely that the worker will be deemed an independent contractor.

We encourage employers to take proactive steps to prevent independent contractor misclassification and to review the status of their workers as employees or independent contractors.  Some steps employers can take include the following: (i) evaluate their business’s need and use of independent contractors; (ii) review and update any independent contractor agreements to comply with the DOL’s 2024 rule; (iii) create an evaluation and approval process for the retention of new independent contractors; (iv) review your business’s benefit plans to ensure independent contractors are not covered under those plans; and (v) continually monitor for legal developments in any jurisdictions where independent contractors are providing services.

This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with Rimon, P.C. or its affiliates.

Dave Mahoney advises private business owners and their human resources professionals on how to navigate the always evolving employer-employee relationship. Dave is a trusted resource who advises companies, large and small – union and non-union, with the day-to-day challenges of complying with constantly changing federal, state, and local laws. Dave takes a proactive approach, helping employers avoid disputes by establishing policies and procedures that are designed to establish clear avenues of communication and expectations between companies and their workforces to avoid litigation whenever possible. Dave also regularly conducts internal audits and investigations to solve problems before they arise. Read more here.

Haley Trust practices in the areas of bankruptcy and creditors’ rights, trusts and estates and labor and employment law. Read more here.