Not all workers are employees. Some might be independent contractors. Figuring out if your worker is an employee or independent contractor under the Department of Labor (DOL) guidelines can be difficult. The new DOL contractor rule 2024 aims to eliminate confusion. It provides detailed guidance on worker status. As a result, the number of workers classified as employees may increase.
What’s included in the new final independent contractor rule? Will this lead to reclassifying and converting contractors to employees?
What is the new DOL contractor rule 2024?
On January 10, 2024, the Department of Labor published a final rule on employee vs. independent contractor classification. This rule officially rescinds the 2021 Independent Contractor Status Under the Fair Labor Standards Act established under the Trump Administration.
According to the DOL, the new 2024 DOL contractor rule under the Biden Administration:
- Returns to the multifactor analysis to assess worker classification
- Explains that all factors are important in determining worker classification
- Uses the longstanding six-part Economic Reality Test
| The Bottom Line: The 2024 rule officially gets rid of the 2021 rule and brings back the longstanding multifactor test to determine contractor vs. employee. |
The Department of Labor says the 2024 rule will reduce confusion, improve compliance, and better protect workers than the 2021 rule. But when the rule was first proposed, SHRM noted that it could cause uncertainty and confusion for employers. It can also impact workers’ ability to work independently, particularly gig workers (e.g., delivery drivers) and freelancers.
The new rule will go into effect on March 11, 2024. According to JD Supra, the 2024 rule will likely face legal challenges, but the DOL is confident about its legality.
What was the 2021 DOL contractor rule?
The 2021 rule was coined “employer-friendly” and focused mainly on two core factors—a worker’s control and opportunity for profit and loss. It also prohibited considering whether the worker’s work is central or important to the business.
The Department of Labor withdrew the 2021 rule because they believed it was “out of sync with longstanding judicial precedent and increased the likelihood of misclassification.”
Factors to consider under the 2024 rule
The DOL contractor rule 2024, effective March 11, brings back the following six factors for determining worker status. Employers must consider:
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and the business
- Degree of permanence of the work relationship
- Nature and degree of control
- The extent to which the work performed is an integral part of the employer’s business
- Skill and initiative
Under the new rule, employers must consider all factors equally. The factors do not have a predetermined weight like the 2021 rule.
This rule does not implement the ABC Test under the FLSA. President Biden had previously expressed support for the ABC test, which several states use, including California and Massachusetts. Unlike the 2024 DOL rule, the ABC test focuses on control, whether the work is outside the usual course of the hirer’s business, and whether the worker customarily engages in the type of work.
Here is a closer look at the six factors.
1. Opportunity for profit or loss
Does the worker have opportunities for profit or loss that impact their economic success or failure?
Here are some questions to ask to determine the worker’s opportunity for profit or loss:
- Does the worker determine or meaningfully negotiate their pay for the work provided?
- Can the worker accept or decline jobs or choose when they work on jobs?
- Does the worker market, advertise, or do anything else to expand their business?
- Can the worker decide to hire others?
- Can the worker decide to purchase materials and equipment?
- Does the worker decide if they want to rent space?
If the worker does have the opportunity for profit or loss, they may be a contractor. If not, they may be an employee.
2. Investments by the worker and the employer
Are the worker’s investments capital or entrepreneurial in nature—aka, do they serve a business-like function?
The following questions can help you determine if the worker’s investments are business-like:
- Do the investments increase the worker’s ability to do different types of or more work?
- Does the worker reduce costs with their investments?
- Can the worker use their investments to extend market reach?
Consider the worker’s investments relative to your investments in your business. Does the worker make similar types of investments?
If the worker’s investments are business-like and similar to the employer’s business investments, they may be a contractor. If not, they may be an employee.
3. Degree of permanence of the work relationship
How permanent is the working relationship with the worker?
If the worker’s relationship is definite in duration, non-exclusive, project-based, or sporadic, they may be a contractor. If their work relationship is indefinite, continuous, or exclusive of work for other employers, they may be an employee.
4. Nature and degree of control
How much control does the worker have over their work performance and working relationship?
You can use the following questions to get started:
- Do you set the worker’s schedule?
- Can you supervise or discipline the worker?
- Do you explicitly limit their ability to work for others?
- Do you control the worker’s rates for services and their marketing efforts?
If the worker has more control, they may be a contractor. If the potential employer has more control, they may be an employee.
5. The extent to which the work performed is an integral part of the employer’s business
Is the work performed integral to the business?
If the work is not critical, necessary, or central to the business, the worker may be a contractor. If the work is critical, necessary, or central to the business, the worker may be an employee.
6. Skill and initiative
Does the worker use specialized skills to perform their work, and do those skills contribute to business-like initiative?
If the worker’s use of skills is in connection with a business-like initiative, they may be a contractor. If they do not use specialized skills or if their work depends on training from the business, they may be an employee.
Why does worker classification matter?
Worker misclassification is a big deal. It can lead to back taxes and hefty penalties for employers.
Misclassifying a worker as a contractor instead of an employee denies them minimum wage, overtime pay, and other FLSA protections.
Contractors are also responsible for paying their payroll taxes and getting their own benefits (e.g., health insurance).
Need to reclassify workers under the new rule?
The new rule may require employers to reclassify workers and convert contractors to employees.
If you must convert contractors to employees, you can use the following steps to get started:
- Notify the worker and document it in your records
- Gather employee information, such as Forms W-4 and I-9
- Add the employee to your payroll
- Withhold and contribute employment taxes
- Distribute Form W-2 after year-end
For more information, consult the Department of Labor. You can also consult IRS Section 530 to learn more about relief from employment taxes for workers who were classified as contractors.
Do you have both employees and independent contractors? With Patriot’s online payroll, you can pay contractors with your employees in the same payroll. Use free direct deposit or cut your workers a paycheck from the software. Enjoy a free trial when you sign up!
This is not intended as legal advice; for more information, please click here.
