Independent Contractor vs. Employee Status: 2024 Changes
In January 2024, the U.S. Department of Labor (DOL), under the FLSA, issued a final rule for the classification of workers as employees vs. independent contractors (ICs). The rule replaces the short-lived “2021 IC Rule.”, which briefly, but somewhat significantly, modified the criteria used previously when determining whether a worker was really an employee instead of an independent contractor, as defined by the DOL. The DOL’s stance on IC status has been closely watched since the change in 2021 because this has such significant implications on businesses. If you have ICs of any kind, even contracting out large groups of employees like drivers, janitors, caddies, etc. OR just one-off situations of Freelancers or Experts, you will want to take note of this change. As a result businesses should reexamine these relationships under the new standard, by the new rule effective date of March 11th, to ensure they will hold up against any scrutiny under the new test- because there is sure to be more enforcement than ever.
Listen to our recent podcast episode on this subject, which breaks down the new test, as well as other information like why this matters so much, penalties for being out of compliance, and tips for action items to better secure your IC relationships.
What’s the Change?
This “new” old rule, returns to the six factor test previously in place, prior to the 2021 change. Although the DOL lists six factors as being generally the main points of consideration when determining whether a worker is an IC or employee, they have also stated they will be going back to the “Totality of Circumstances” perspective when weighing these factors against one another, and therefore away from the 2021 standard which focused primarily on the two-factors of Profit and Control. The primary question under the new rule that the six factors seek to answer is: Are workers economically dependent on the employer for work or are they in business for themselves? If through an examination of the factors below, and potentially others not listed, the DOL finds economic dependency exists in the relationship, it is likely the IC will be considered misclassified, and the business will be subject to converting and treating the IC as an employee, including retroactively. The six factors are:
1. The worker’s opportunity for profit/loss depending on managerial skill: Can they control profit/loss through their own management, initiative or business acumen or judgment? The focus here is on the IC’s opportunity to do so vs. actually doing this successfully (they can be unprofitable).
2. The relative amount of investment made by the worker in comparison to investments made by the potential employer: Does the worker take on investments that are “capital or entrepreneurial in nature,” that serve a “business-like” function? This includes purchases for large equipment, software, office space, or other needed infrastructure to complete their work. If the answer is no, and especially if this kind of infrastructure is provided by the business they are performing work for, it’s more likely this will be deemed an employment relationship.
3. The permanency of the worker's relationship with the potential employer: Weighs in favor of employee status when the work relationship is indefinite in duration, continuous, or exclusive of work for others.
4. The nature and degree of the potential employer’s control: Considers how much control the business has over key aspects of the worker’s performance. The more control over aspects of what is done and how (the worker’s schedule, task supervision, who else they can work for, training requirements, etc.), the more likely the relationship will be seen an one of an employee.
5. The extent to which the work performed is an integral part of the potential employer’s business: Is the work employed by the contractor critical, necessary, or central to the potential employer’s principal business? If so, it’s likely this is an employment relationship according to the DOL. It’s important to note that the work can be considered integral if it is just one facet of the business performed by one person and/or the work is performed by large numbers of workers.
6. Whether the worker uses specialized skills indicative of business-like initiative: Does the worker use specialized skills and do they contribute to business-like initiative? Is what they do for the business heavily dependent on training from the business? The less specialized in relation to their own business initiative, the more likely the relationship will be deemed as one of employment.
Note: There are also IRS and state specific standards, in some cases far stricter and in favor of the “employee classification”. If you have workers in one of these states, specifically where the “ABC Test” exists, you will want to definitely assess your relationships against these as well. To view an interactive map of state-by-state tests, check out this great tool.
