New Employee vs Independent Contractor Rule Effective March 11

Article Highlights:

  • New U.S. Department of Labor Rule

  • Prior Rule Rescinded

  • Effect on ABC Test Used by Some States

  • New Six Factor Test
    o   Opportunity for Profit or Loss Depending on Managerial Skill
    o   Investments by the Worker and the Potential Employer
    o   Degree of Permanence of the Work Relationship
    o   Nature and Degree of Control
    o   Extent Work Performed Is an Integral Part of the Potential Employer's Business
    o   Skill and Initiative

The U.S. Department of Labor (DOL) announced on Jan. 9, 2024, the issuance of its final rule regarding whether a worker is an employee or an independent contractor under the federal Fair Labor Standards Act (FLSA). The new rule, which becomes effective March 11, 2024, rescinds the 2021 independent contractor rule issued under former President Donald Trump and replaces it with a six-factor test as outlined below. Additional factors may be relevant if they bear on whether the worker is economically dependent on the potential employer for work.

IMPORTANT: The rule does not adopt an "ABC" test and does not impact independent contractor classification under state laws utilizing the "ABC" test, such as California, Massachusetts, New Jersey, and others. The rule only revises the DOL's guidance on how to analyze who is an employee or independent contractor under the FLSA. 

The DOL believes this new rule will provide greater clarity and consistency for businesses. However, it could potentially lead to an influx of litigation against certain businesses, particularly in the transportation and logistics industries, by attorneys seeking to have independent contractors reclassified as employees and awarded damages for overtime and deductions from pay, even if those workers prefer to be independent contractors.

The following is an overview of relevant factors associated with each of the new six-factor tests: 

1.    Opportunity for Profit or Loss Depending on Managerial Skill:

  • Whether the worker determines or can meaningfully negotiate the charge or pay for the work provided,

  • Whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed,

  • Whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work,

  • Whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space,

  • If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee. 

2.    Investment by the Worker and the Employer -This factor considers whether any investments by a worker are capital or entrepreneurial in nature. Costs to a worker of tools and equipment to perform a specific job, costs of workers’ labor, and costs that the potential employer imposes unilaterally on the worker are not evidence of capital or entrepreneurial investment and indicate employee status. Investments that are capital or entrepreneurial in nature and thus indicate independent contractor status generally support an independent business and serve a business-like function, such as increasing the worker's ability to do different types of or more work, reducing costs, or extending market reach. Additionally, the worker's investments should be considered on a relative basis with the potential employer's investments in its overall business. The worker’s investments do not have to be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of investments or the sizes of the worker and the potential employer. Instead, the focus should be on comparing the investments to determine whether the worker is making similar types of investments as the potential employer (even if on a smaller scale) to suggest that the worker is operating independently, which would indicate independent contractor status.

3.    Degree of Permanence of the Work Relationship -This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers. This factor weighs in favor of the worker being an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities. This may include regularly occurring fixed periods of work, although the seasonal or temporary nature of work by itself would not necessarily indicate independent contractor classification. Where a lack of permanence is due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ, this factor is not necessarily indicative of independent contractor status unless the worker is exercising their own independent business initiative.

4.    Nature and Degree of Control - This factor considers the potential employer's control, including reserved control, over the performance of the work and the economic aspects of the working relationship. Facts relevant to the potential employer's control over the worker include whether the potential employer sets the worker's schedule, supervises the performance of the work, or explicitly limits the worker's ability to work for others.

5.    Extent to Which the Work Performed Is an Integral Part of the Employer’s Business - This factor considers whether the work performed is an integral part of the potential employer’s business. This factor does not depend on whether any individual worker in particular is an integral part of the business, but rather whether the function they perform is an integral part of the business. This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the potential employer's principal business. This factor weighs in favor of the worker being an independent contractor when the work they perform is not critical, necessary, or central to the potential employer's principal business.

6.    Skill and Initiative - This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work. Where the worker brings specialized skills to the work relationship, this fact is not itself indicative of independent contractor status because both employees and independent contractors may be skilled workers. It is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.  

NOTE: The Department of Labor (DOL) and the Internal Revenue Service (IRS) use different criteria for determining whether a worker is an employee or independent contractor, and the criteria serve different purposes.

The DOLs criteria are primarily used for determining eligibility for wage and hourly protections under the Fair Labor Standards Act (FLSA), while the IRS’s 20-factor control test is used for tax purposes.

If you have additional questions, please contact this office for additional information and assistance.

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