New Test for Employee vs. Independent Contractor

On January 9, 2024, the US Department of Labor (DOL) released a rule setting forth the new standard for properly classifying workers as independent contractors. As a reminder, the classification of a worker as a W-2 employee or an independent contractor governs their eligibility for minimum wages, overtime pay, and other rights protected under the federal Fair Labor Standards Act (FLSA). There are also IRS tax implications and other consequences under federal and state laws. Employers who misclassify workers can face substantial liability for back pay, taxes, and other penalties.

As of March 11, 2024, the US Department of Labor (DOL) will return to the analysis it has historically used to classify workers, employing a six-factor balancing test to assess the relationship between employer and worker. The DOL’s new rule specifically rescinds a modified independent contractor test issued under the Trump Administration in 2021.

Under the DOL rule, the classification of a worker will be determined by evaluating the following six-factors:

  • opportunity for profit or loss depending on managerial skill;
  • investments by the worker and the potential employer;
  • degree of permanence of the work relationship;
  • nature and degree of potential employer’s control over the work being performed (considering issues such as scheduling, supervision, setting prices or rates, worker’s ability to work for others, etc.);
  • extent to which the work performed is an integral part of potential employer’s business; and
  • whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative.

These factors will be assessed under a “totality of the circumstances” approach, each one viewed equally, with no factor(s) afforded more weight than others. Furthermore, the DOL will consider additional, unspecified factors if they indicate in some way whether the worker is in business for themself, as opposed to being economically dependent on the employer for work.

With the effective date of the DOL’s new test on the horizon, now is a good time to review your workforce and the status of any independent contractors. Your partners at Lake Effect can help evaluate whether your workers are classified properly, minimizing your future exposure to hefty back pay awards and other penalties.

Lake Effect is here to answer all your questions about employment laws, regulations, and new agency guidelines. We continue to monitor important legal and HR developments, as well as other information that could impact the workplace. Please watch our blogs and emails for these important updates, as well as discussions of how compliance meets culture. To dive into these issues, contact us at info@le-hrlaw.com or 1-844-333-5253.

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