Everything old is new again – at least as far as the U.S. Department of Labor (“DOL”) is concerned. Effective March 11, 2024, it will be more difficult for businesses to classify workers as independent contractors thanks to a DOL rule published on January 10, 2024. This new rule rescinds the current, more business-friendly rule and reverts to the DOL’s pre-2021 standard for determining whether workers are improperly classified. The result is that businesses are at greater risk when utilizing independent contractors.
Prior to 2021, the DOL utilized a long-standing economic reality test to determine whether a worker was an employee or an independent contractor. Essentially, the test consisted of six (6) factors that the DOL considered to determine whether workers were economically dependent on the employer for work or were in business for themselves.
In 2021, the DOL simplified the analysis with a new rule that focused on two (2) core factors – the nature and degree of control over the work and the workers’ opportunity for profit or loss. Three (3) other factors were included in the rule – amount of skill required, degree of permanence of the relationship, and whether the work was part of an integrated unit of production – but these factors were not given the same weight as the two core factors. This 2021 rule placed the focus on control, making it easier for businesses to know when a worker was properly classified as an independent contractor. For example, a worker that had control over their schedule and manner in which their work was performed would likely be properly classified as an independent contractor, according to the 2021 DOL.
As of March 11, the DOL will revert to its old method of determining whether independent contractors should be classified as employees. The “new” rule returns to a totality-of-the-circumstances test, meaning the following six (6) factors will be considered with no one factor having predetermined weight:
- 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 control
- Extent to which the work performed is an integral part of the business
- Skill and initiative
The DOL also left the door open to consider “additional factors” if they are relevant to the ultimate question of whether the workers are economically dependent on the employer for work or are in business for themselves.
The DOL is not the only agency scrutinizing the classification of workers as independent contractors. The IRS has collaborated with the DOL for years to ensure that businesses are paying taxes on 1099 workers who should have been classified as W-2 employees. In 2023, the National Labor Relations Board (“NLRB”) announced it was returning to a multi-factor analysis (similar to the new DOL rule) that would lead to more workers being improperly classified as independent contractors. Additionally, several of the states have enacted the stringent “ABC test” which makes it virtually impossible to classify workers as independent contractors if they are performing the same or similar work as employees.
This latest rule by the DOL is part of the continued trend to clamp down on businesses utilizing independent contractors. This seems counterintuitive to the ever-growing gig economy. Plus, businesses need to remember that whether or not the worker wants to be classified as an independent contractor is irrelevant, and a worker who has formed an LLC to contract with your business may not be exempt from scrutiny either.
So what should businesses do? Before March 11, 2024, evaluate your independent contractor workforce. Do you have independent contractors performing the same or similar work as regular employees? Do you have independent contractors who work exclusively for your business? Do you have independent contractors who have been working for your business on a permanent basis? If you answered “yes” to any of these questions, you should consult with your attorney. Reclassification may not always be required, but the analysis is complex as it involves an application of the new DOL rule, the rules of your particular state, and the rules of other federal agencies. The consequences for misclassification can be steep, including unpaid employment taxes, overtime liability under the Fair Labor Standards Act and loss of benefits, not to mention penalties and fines issued by the government. February is the time to do an audit and implement any necessary changes.
If you have any further questions regarding the new DOL rule and how it may affect your company, please contact Leslie Goff Sanders.
