A new U.S. Department of Labor rule that takes effect March 11, 2024 will revise a company’s consideration of whether a worker should be classified as an employee or an independent contractor. The new rule rescinds the Independent Contractor Status under the Fair Labor Standards Act (FLSA) published in 2021, which made it easier to designate workers as independent contractors rather than employees.

This change is important for all employers; misclassifying an employee could lead to legal liabilities, including back wages, payroll taxes, penalties, lawsuits, and other protections for which an employee is entitled.

According to the Department of Labor’s Wage and Hour Division, the new final rule is intended to “reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.”

The change in classification

The current – until March 10, 2024 – rule considered only two factors in determining if a worker is an independent contractor or an employee: the nature and degree of the worker’s control over their work, and the potential for a worker’s profit or loss based on their initiative for, and investment in, the work.

The new “independent contractor” rule beginning March 11 restores the multifactor analysis that was in place until 2021. This includes six factors related to “economic reality” and a worker’s relationship with an employer. These are:

• the opportunity for a worker’s profit or loss depending on managerial skill;
• the financial stake and resources a worker invests in the work;
• the permanence of the work relationship;
• the control an employer has over the person’s work;
• whether the work is essential to the employer’s business;
• the worker’s skill and initiative.

None of these factors, by themselves, determine a worker’s status; all six are considered relevant factors in the determination.

Many companies rely heavily on independent contractors for both project-based and ongoing work. The new rule creates a more complex process – and more to consider – when hiring new workers. Employers should consider their existing and future worker relationships and independent contractor agreements so that they are consistent and in compliance.

Dembo Jones can assist you as you integrate these new requirements into your employee classification. Contact us today to learn how we can help.