Department of Labor Issues Rule on Independent Contractor versus Employee Classification

The US Department of Labor (“DOL”) has updated its regulations concerning the classifications of Independent Contractors versus employees. The updated rule went into effect March 11, 2024.

This rule rescinds the prior 2021 Independent Contractor rule (“IC rule”) because, according to the DOL, it departed from prior case law in applying the well-known multifactor economic reality test. Further, the DOL reported that the IC rule did not align with the Fair Labor Standard Act’s test and purpose. This rule had “core factors” that were weighed more heavily in determining the status of workers.

The new rule adopts the “economic reality test” for federal wage and hour law issues. Primarily, this test looks at whether, as a matter of economic reality, the workers are in business for themselves. Further, it is a “totality of the circumstances” approach, meaning that each factor holds the same amount of weight when determining worker classification, and should be reviewed globally as opposed to focusing in on or two factors. The factors are: 

1. Opportunity for profit or loss depending on managerial skill; 
2. Investments by the worker and potential employer; 
3. Degree of permanence of work relationship; 
4. Nature and degree of control; 
5. Extent to which work performed is an integral part of employer’s business; and 
6. Skill and initiative. 

The DOL clarified that additional factors may be considered if they are relevant to the overarching question of economic dependence. 

DOL enacted this guidance to provide direction to employers in determining the economic dependence of workers, and to workers in determining if they are correctly classified. Further, DOL stated that they recognize the importance of independent contractors in our economy, and find it to be a primary objective to provide a consistent approach to businesses and workers who employ and are independent contractors.

For more information, please see the resource page from the Department of Labor. Misclassification of Employees as Independent Contractors Under the Fair Labor Standards Act | U.S. Department of Labor (dol.gov) 

Employers who hire independent contractors must be aware of this rule when deciding wages, hours, and benefits for these types of workers. Misclassifications can create liability for an employer, including the payment of lost wages and back pay, PTO, benefits, and/or unpaid overtime. If you have questions regarding the classifications of your workers or need review of your policies to ensure their compliance with federal rules, contact Lance Ziebell at lziebell@lavellelaw.com or MaryAllison Mahacek at mmahacek@lavellelaw.com to set up a consultation.