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The DOL issued its final rule defining “independent contractor” and rules for independent contractor classification. This rule replaces the DOL’s 2021 independent contractor definition and goes into effect on March 11, 2024.
At Gardner Employment Law, we stay current with the DOL’s decisions, so that we can advise you on how to better manage your company’s operations. Read more to learn about the new definition.
What Is New About the DOL’s Definition of an Independent Contractor?
The DOL’s new rule clarifies how to classify workers and increases the likelihood of reclassifying some independent contractors as employees. The updated definition of an independent contractor introduces the assessment of several key factors, departing from previous rigid criteria.
The rule aims to provide clarity and consistency in determining whether workers should be classified as employees or independent contractors. This approach ensures compliance with regulations regarding minimum wage, overtime protections, and eligibility for employer benefits.
The new rule encourage employers to think about Social Security, Medicare, and employment taxes when classifying workers. Independent contractors generally pay their own taxes, so employers must classify workers correctly to avoid tax liabilities. Following these rules ensures everyone gets what they should and keeps the company out of legal trouble.
Using a comparative approach, a worker’s classification as an “independent contractor” or “employee” depends in large part on the level of control exerted by the purchaser of the worker’s services. If you engage a roofing company to install a new roof on your house, you will not instruct the roofer where to place the ladders, what size or types of nails to use, and the like. Obviously, the roofer presumably knows what to do and takes control over the activities. The roofer is an independent contractor.
A worker is an employee if someone has the authority to direct or control the worker’s actions and methods, including the final results and the specifics of when, where, and how the work is performed. This control need not be actively exercised. It is the right to control that indicates an employment relationship.
If an employment relationship exists, it does not matter that the employee is called something different, such as agent, contract labor, or subcontractor – the person is not an “independent contractor.” The saying comes to mind: “If it waddles like a duck, has feathers like a duck, and quacks like a duck, it’s a duck.” Titles or a contract stating otherwise will not make it so. Even if the company and the worker agree that he or she is an “independent contractor,” that will not stand up in court. It is the various factors listed below which ultimately show that the company has the right to control how the work is performed which determines whether a worker is classified as an employee or an independent contractor.
How Does the DOL’s New Rule Clarify Independent Contractor Classification?
The DOL’s final rule simplifies worker classification by evaluating six key factors. The classification process involves assessing the following factors, with no single criterion carrying more weight. These key factors include:
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- Opportunity for profit or loss: Does the worker have the opportunity to earn a profit or potentially incur a loss based on managerial skills and decisions made during the work?
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- Nature and degree of control: Does the worker have the authority decide and take control over the project, including how, when, and where the worker performs his or her duties?
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- Degree of permanence of the work relationship: What is the duration of the project and stability of the working arrangement between employer and worker? In other words, is this a one-time project?
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- Integral Part of the Employer’s Business: Are the worker’s services essential to the longevity and operations of employer’s business or is this project just one component of the company’s overall operations?
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- Specialized skill and Initiative: Does the worker possess expertise in his or her respective field and take initiative and special know-how in completing tasks?
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- Relative amount of investment of capital: Does the worker purchase and use tools, equipment, or resources necessary to perform work?
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The more of these questions that are answered “yes,” the more likely that the worker is an independent contractor. Applying these factors will provide the proper classification for a worker’s status under the FLSA (Fair Labor Standards Act). It ensures that workers receive appropriate protections and benefits in accordance with their classification. The DOL’s final rule applies only when determining worker classification under FLSA, although rulings by the DOL carry weight in other employment contexts.
Why is Correct Classification Important?
Correctly classifying a worker as an “independent contractor” or “employee” is important because a misclassified worker may be eligible for reimbursement for unpaid wages, overtime, back-taxes and employment benefits such as Social Security, Medicare, and unemployment benefits. That can add up to a lot of money.
I once gave a presentation on this topic to a remodelers’ association. Afterwards a participant came up to tell me about a situation in which he had misclassified employees as independent contractors. As a consequence, his company was obligated to pay years of back taxes and employment benefits that totaled thousands of dollars. You don’t want the IRS knocking on your door.
Additionally, being misclassified could mean employees miss out on workers’ compensation benefits, disability payments, health insurance, retirement benefits, and stock options. Accurate classification ensures that employees receive the full range of benefits and protections afforded to them under the law.
Other risks include litigation, financial penalties, and reputational harm. Beyond the financial implications, misclassification can tarnish your company’s reputation and erode trust among employees, customers, and stakeholders.
If you occupy a position of management, you do not want to report these consequences to your board of directors. To mitigate these risks, those in charge must proactively assess their worker classification practices, conduct internal audits, and seek legal guidance when necessary.
Contact a Employment Classification Expert
The recent change in the DOL’s rule for defining independent contractors is complex. If you need help understanding how the DOL’s final rule may affect your management decisions, we’re happy to provide that help.