The Impact of New DOL Rule on Independent Contractor Classification

As a business owner, staying updated with regulatory changes is crucial for maintaining compliance and avoiding potential legal pitfalls. One of the latest developments you should be aware of is the Department of Labor’s (DOL) new rule on classifying independent contractors. This rule has significant implications for how you classify and manage your workforce. This article provides a general overview on the new rule regarding classifying independent contractors.   What is an independent contractor? Independent contractors may also be referred to as a freelancer, or a person who is “self-employed”. The term “independent contractors” as it is defined in this rule refers to workers who are not economically dependent on an employer and are in business for themselves. This rule does not prevent independent contractors from being in business for themselves. Rather, it places the burden on companies contracting with persons in an independent contracting relationship to verify that those workers are actually bona fide independent contractors, rather than employees, who are entitled to more rights and benefits. The FLSA generally requires covered employers to pay nonexempt employees at least the Federal minimum wage for all hours worked. Employers also have to abide by overtime rules and maintain certain records for employees – all of these protections, and others, are not afforded to independent contractors.   What is the New Rule? The DOL’s final rule became effective March 1, 2024. It rescinded the determination of an employee vs an independent contractor that was determined under the economic realities test. The previous “economic realities” test has been replaced with a “totality-of-the-circumstances” analysis, looking at whether the below economic realities factors support an employee relationship rather than pointing to a true independent contractor. Economic dependence is the ultimate inquiry. A worker is an independent contractor, not an employee, if the worker is truly in business for themselves. Here is a brief summary of these factors and how they may be interpreted:

1. Opportunity for profit or loss depending on managerial skill. This looks at not just the money coming in to the worker, but whether the independent contractor can realize profit or loss based on their own managerial skills. Can they accept and decline jobs? Negotiate the charge/pay? Choose the time of job performance? Are they marketing their business independently?

2. Investments by the worker and the employer. According to the DOL, workers purchasing their own tools for the job does not count as an investment by the worker into their skill or trade. The investments must be entrepreneurial or capital, towards the goal of expanding the reach of the worker’s business or reducing costs. Paying costs that are unilaterally imposed by the hiring entity is not an investments.

3. Degree of permanence of the work relationship. If your business is the only “client” of an “independent contractor, that points to an employee relationship, as does where the work relationship is continuous, or excludes other work, or indefinite in duration. Versus non-exclusive, project-based or sporadic work supports an independent contractor finding.

4. Nature and degree of control. The DOL takes an expansive view of what might encompass control by the business over the worker, leading to an employee determination. Among these are: where the employer sets the work schedule or supervises the work, where the worker is not able to perform work for other employers, where the employer controls the pricing/marketing of the job, or imposes compliance methods to ensure quality control or customer service standards. In the final rule, the DOL clarified that a company’s actions for the sole purpose of complying with applicable laws or regulations is NOT an indicia of control. But, additional compliance measures to satisfy quality control or customer service standards, is.

5. The extent to which the work performed is an integral part of the employer’s business. Fairly self-explanatory, this factor queries whether the work performed by the worker is critical, necessary, or central to the employer’s business. If it is, that suggests an employee relationship.

6. Skill and initiative. Specialized skill alone is not enough to avoid an employee classification. The worker must be using their skill in a manner that contributes to their business initiative.

7. The DOL also includes “additional factors may be relevant” in making the determination. This considers any factors that point for or against the worker’s economic dependence on the employer for work. Having alternative sources of wealth or income is not relevant in the determination.

Dangers of Misclassification

Properly classifying your workers is essential to avoid legal and financial repercussions. The DOL has increased its enforcement efforts to identify and address misclassification. This means businesses are more likely to face audits and investigations if there are indications of non-compliance. Misclassification can lead to:

• Legal Action: Misclassified workers may file lawsuits against your business, leading to costly legal battles.

• Financial Penalties for non-compliance: Fines for non-compliance can be substantial and impact your bottom line. These may include, but are not limited to, potential exposure for back taxes and fines and back payments for unpaid wages and benefits.

• Reputational Damage: Non-compliance can harm your business's reputation, making it harder to attract and retain talent.

Steps to Ensure Continuing Compliance

1. Review Worker Roles: Conduct a thorough review of all worker roles to ensure they are correctly classified. Pay close attention to the control you exert over their work and their independence in performing tasks. Change independent contractors to employees, where needed.

2. Consult with Counsel: Given the complexities of employment law, it's wise to consult with legal counsel who can provide guidance tailored to your business's specific circumstances.

3. Implement Clear Policies: Develop and implement clear policies for hiring and managing independent contractors. Ensure these policies align with the criteria and are consistently applied.

4. Stay Informed: Keep abreast of any updates or changes to the rule. The regulatory landscape can evolve, and staying informed will help you maintain compliance.

How EQUES® Law Group Can Help

Navigating the complexities of employment law can be challenging, but you don't have to do it alone. At EQUES® Law Group, our experienced employment law attorneys are here to assist you. We offer comprehensive legal services to ensure your business remains compliant with the FTC's new rule and other regulatory requirements. Our team can help you review your current worker classifications, develop compliant policies, and provide ongoing legal support. Reach out to us today to schedule a consultation and protect your business from potential risks associated with worker misclassification. Together, we can ensure your workforce is managed in a fair, compliant, and efficient manner.   Moriah Hinton Business and Labor/Employment Attorney EQUES® Law Group