What You Need to Know

Designed to clarify things for employers to help them avoid misclassification, the U.S. Department of Labor released a final rule this week that changes the criteria for classifying independent contractors. What’s the new rule and what do you need to know to comply? We’ll break it down here.

The DOL Rule

The new rule defines who is an independent contractor under the Fair Labor Standards Act (FLSA), rescinding a 2011 rule that defined the same. It features a six-factor test focused on the economic reality of the relationship between the employer and worker, with no one factor carrying more weight than the others.

The six factors are:

1. The opportunity for profit or loss a worker may have based on managerial skill: This factor considers whether the worker exercises managerial skill that affects their economic success or failure in performing the work.
2. Investments by the worker and potential employer: This point takes into account whether any investments by a worker are capital or entrepreneurial in nature.
3. The degree of permanence of the work relationship. This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration or continues and weighs in favor of the worker being an independent contractor with the relationship is definite in duration, non-exclusive, project-based or sporadic.
4. The degree of control an employer has over a person’s work. While the rule notes that setting a worker’s schedule, compelling attendance, or directing or supervising their work are examples of direct control, companies may also exercise indirect control, such as by setting prices for services or restricting a worker’s ability to work for others.
5. Whether the work the person does is an integral part of the employer’s business. This factor focuses on whether the work is critical, necessary or central to their principal business.
6. The worker’s skill and initiative. The last factor considers whether a worker uses specialized skills to perform the work and whether those skills contribute to a business-like initiative.

These six factors align with judicial precedent used for decades to determine a worker’s status. It’s important to note that additional factors may also be considered if they are relevant to the question of economic dependence.

Why it Matters

The idea behind the new rule is to provide more consistent guidance to employers as they determine whether workers are economically dependent on them for work or are in business for themselves. It also helps workers understand if they are correctly classified as employees or independent contractors.

What You Need to Do Now

The final rule takes effect March 11, 2024. Before then, be sure to review your policies regarding worker classification to ensure they comply with the economic realities test. Keep in mind that this final rule only changes the interpretation under the FLSA and has no effect on other federal, state or local laws that use different standards for employee classification.

It’s also important to review all of your independent contractor roles and ensure they are still classified correctly under the new rule. If you have some who may now need to be classified as employees, you’ll need to decide if you want to make changes to the relationships, such as how you manage those workers, to keep them as independent contractors.

Lastly, in light of the attention around the new rule, be prepared to answer questions from your independent contractors about their status. Now may also be a good time to strengthen your independent contractor agreements to establish clear expectations going forward.

Looking for more guidance? isolved’s HR Services can assist in determining employee versus independent contractor status so you feel confident about these classifications.

About the author:

Susan Reardon, HR Content Advisor with isolved, is a licensed attorney and communications professional with 20-plus years of experience in HR, insurance and employee benefits.

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