New regulation regarding independent contractor classification

On January 9, 2024, the U.S. Department of Labor (“DOL”) released its final rule effective on March 11, 2024, regarding the proper classification of independent contractors under the Fair Labor Standards Act (“FLSA”).

• The final rule is available here (“2024 IC Rule”).
• See Frequently Asked Questions here.
• Also see Small Business Compliance Guide here.

The DOL’s stated goal is to reduce the risk of misclassification of employees, which not only negatively impacts workers, but creates significant legal exposure for employers, including hefty penalties, back pay for unpaid overtime, liquidated damages, and attorneys’ fees.

The 2024 IC Rule will make it more difficult for companies to use and maintain the independent contractor classification. It changes the way in which the DOL determines whether a worker is properly classified as an independent contractor or is really an employee under the FLSA and entitled to minimum wage, overtime, and other protections. It is expected that this rule will have a significant impact on industries that regularly rely on the independent contractor classification, such as trucking, construction, and healthcare.

The 2024 IC Rule reaffirms that a worker is not an independent contractor if the worker is economically dependent on an employer for work. More specifically, the 2024 IC Rule provides for an analysis that considers a six (6) factor analysis (any language in quotes is from the law):

1. The worker’s opportunity for profit or loss (or does the worker’s opportunity for profit and loss depend on her/his/their managerial skills?)

• Does the worker have opportunities to make more money or less money depending on managerial skill?
• Does the worker make the following decisions?
  • determine or meaningfully negotiate their pay?
  • accept or decline jobs?
  • control the timing of when the job gets done?
  • advertise their business?
  • make decisions to hire others, purchase materials and equipment, and/or rent space?
• If a worker does not make these types of decisions, employee status is suggested.
• Basically, “economic dependence is the ultimate inquiry for determining whether a worker is an independent contractor of an employee”.
• The analysis is whether the worker makes business decisions for themselves or does the employer make them.

2. Investments made by the worker and the employer.

• Does the worker make capital investments in the business? If so, that may indicate independent contractor status.
• A worker’s investments in vehicles for a business purpose may be considered investments of capital or entrepreneurial in nature. For example, a truck driver who owns his own truck.
• The worker’s investments can be evaluated on a relative basis with the company’s investments, “not only in terms of dollar value or size of the investments, but also on whether the worker is making similar types of investments as the employer that would suggest the worker is operating independently.”

3. The degree of permanence of the relationship between the worker and the employer.

• When the work relationship is indefinite in duration, continuous, or exclusive of work for other employers, employee status is suggested.
• When the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themselves and marketing their services or labor to multiple entities, independent contractor status is suggested.

4. The nature and degree of control by the employer over the worker.

• What is the employer’s control over the performance of the work and the economic aspects of the working relationship?
  • Does the employer set the worker’s schedule, supervise performance?
  • Does the employer explicitly limit worker ability to work for others?
  • Does the employer use technological means to supervise work performance (via a device or electronically)?
  • Does the employer have the right to supervise/discipline workers?
  • Does the employer control economic aspects of the working relationship, including control over prices or rates for services and the marketing of the services provided by the worker?
• The employer’s requirements for compliance with a specific law or regulation (e.g., safety regulations) are not indicative of control.
• Note that a company that asks a worker to sign a non-compete may inadvertently create an employer-employee relationship with an individual intended to be an independent contractor.

5. The extent to which the work performed by the worker is an integral part of the employer’s business.

• How integral is the worker’s function to the business? This is not a consideration of whether any individual worker is integral to the business.
• When the work performed is critical, necessary, or central to the employer’s principal business, employee status is suggested, for instance driving a truck is an integral part of the transportation company’s business.
• When the work performed is not critical, necessary, or central to the potential employer’s principal business, independent contractor status is suggested.

6. The worker’s skill and initiative.

• Does the worker use specialized skills to perform the work?
• Do the worker’s skills contribute to entrepreneurial initiative?
• If a worker uses specialized skills, this can indicate independent contractor status.
• If the worker depends on the employer for training or does not use specialized skills, then he/she/they will probably be considered an employee.

No single factor automatically determines whether a worker is properly classified as an employee or an independent contractor and “the analysis . . . cannot be conducted like a scorecard or a checklist”. Instead, the factors must be weighed according to the totality of the circumstances, and one or more factors in a particular situation may be more important than other factors going the opposite way.

In addition to the new DOL rule, businesses should continue to comply with the Internal Revenue Service’s (IRS) separate rules on independent contractor classification for employer-tax found here.

What companies should do now:

1. Understand the criteria outlined in the 2024 IC Rule for determining whether a worker should be classified as an employee or an independent contractor. This includes objectively evaluating factors such as the nature of the work relationship, financial considerations, control over work, and the significance of the worker’s role to your business.
2. Conduct a comprehensive objective review of your existing workforce and evaluate the classification of all independent contractors. Ensure that your classifications align with the 2024 IC Rule’s guidelines and criteria.
3. Keep detailed records of worker classifications, agreements, and any related communications. Maintaining accurate and thorough documentation can help demonstrate compliance with the new final rule and mitigate potential risks.
4. Assess the potential impact of the new rule on your business operations, costs, and overall workforce management strategies. Be prepared to make necessary adjustments to mitigate any adverse effects and capitalize on opportunities for improvement.
5. Due to the complexities surrounding worker classification and the potential legal implications of misclassification, consider consulting with our firm as your legal advisors to review your practices and provide guidance.
6. In the event of a DOL audit for your business, the 2024 IC Rule provides a road map. The six factors are what DOL considers most relevant, and your company can structure your arguments to fit within these factors.
7. Please recognize that these rules have been changing over time and will continue to change in the future. This summary reflects the current rule effective March 11, 2024.

For additional information about the content in this post or assistance with any questions about your business, the attorneys at B&D are ready to help you. Reach out to us.