By Heidi Nunn-Gilman, Julie Pace and David A. Selden
On January 10, 2024, the U.S. Department of Labor announced a final new rule regarding the classification of workers as independent contractors or employees. The new rule goes into effect March 11, 2024. The final rule rescinds the independent contractor rule implemented in 2021 under the Trump Administration. According to DOL, the new rule embodies the “economic reality” test based on the totality of circumstances, as previously established by the courts.
NEW SIX FACTOR TEST FOR DETERMINING INDEPENDENT CONTRACTOR STATUS.
The final rule applies the following six factors to analyze whether workers are employees or independent contractors:
- a. opportunity for profit or loss depending on managerial skill;
- b. investments by the worker and the potential employer;
- c. degree of permanence of the work relationship;
- d. nature and degree of control;
- e. extent to which the work performed is an integral part of the potential employer’s business; and
- skill and initiative
According to the DOL, no factor has any predetermined weight and additional factors could be considered if they indicate whether the worker is in business for themselves or is economically dependent on the employer.
THE RULE PROVIDES EXPLANATIONS OF THE SIX FACTORS.
The new rule contains explanations of how DOL will interpret each of the six factors and what facts may be relevant to determining whether the factor supports the conclusion that an employee is an independent contractor or an employee.
Opportunity for profit or loss depending on managerial skill considers facts such as:
a. whether the worker can meaningfully negotiate the charges for their services;
b. whether the worker can choose the timing of the work and accept or reject assignments;
c. whether the worker markets and advertises their services or makes efforts to secure and expand their business;
d. whether the worker makes decisions about hiring workers, renting space, purchasing or renting materials and equipment, etc.
Decisions such as whether to work more hours at a fixed rate job does not, according to the new rules, reflect the exercise of managerial skill.
Investment by the worker and employer considers whether the worker is making investments that are capital or entrepreneurial in nature. Tools or equipment for a specific job or costs imposed by the employer are not considered capital or entrepreneurial in nature. Capital or entrepreneurial investments “serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach.” The investment by the worker is also compared against the company’s investment in terms of whether the worker is making similar types of investments to the company, even if on a smaller scale.
Degree of permanence of the work relationship favors employee status when it is indefinite, continuous, or exclusive. It favors independent contractor status when the work is project-based, sporadic, definite in duration, and non-exclusive.
Nature and degree of control considers not only the company’s actual control, but also the company’s right to control the performance of the work. Relevant facts may include:
a. whether the company sets the workers’ schedule;
b. whether the company supervises the performance of the work;
c. whether the company limits the worker’s ability to work for others;
d. whether the company uses technological means to supervise the work;
e. whether the company reserves the right to supervise or discipline the worker;
f. whether the company controls the economic aspects of the work, including controlling prices or rates for services and the marketing of the worker’s products or services.
Oversight for the sole purposes of complying with specific applicable federal, state, tribal, or local laws or regulations does not indicate control over the worker for purposes of the new rules.
Extent to which the work performed if an integral part of the employer’s business looks at whether the work that is performed is an integral part of the company’s business, such as whether the work is “critical, necessary, or central” to the business, which would suggest an employee. If the work is not “critical, necessary, or central” then this factor suggest independent contractor status.
Skill and initiative looks at whether the worker uses specialized skills and whether those skills contribute to business-like initiative. This factor supports a finding that a worker is an employee where the worker does not use specialized skills or is dependent on training from the company. The use of specialized skills alone, however, does not indicate an independent contractor relationship. The specialized skills must be used in connection with “business-like initiative.”
Additional factors may include any factors that DOL believes would indicate whether the worker is in business for themselves or are economically dependent on the potential employer for work.
PENALTIES FOR MISCLASSIFICATION OF WORKERS.
If a worker is an employee, rather than an independent contractor, they are entitled to the minimum wage, overtime, and other rights of employees. Generally employers are required to track the hours worked by non-exempt employees, while independent contractors often are paid by the project and do not track hours. If DOL determines that a worker is misclassified, then they will calculate any minimum wage or overtime that should have been paid. Overtime can result in hundreds of thousand of dollars of back wages for misclassified workers. DOL can also impose additional civil monetary penalties.
SUMMARY AND TIPS
Companies using independent contractors should analyze their independent contractor relationships under the new rules to help ensure that the individuals are properly classified. Companies should ensure that they have written independent contractor agreements and obtain from the independent contractor a Form W-9, proof of workers’ compensation or other insurance, business cards, advertisements, or website where the contractor advertises services to others, copies of business licenses, records of negotiations over rates of pay, etc. to help demonstrate that the fix factors of the economic reality test favor independent contractor status.
The attorneys at PSGM Law are available to assist companies to review their wage and hour compliance and independent contractor relationships. We can assist with analyzing workers to identify the correct classification as independent contractor or employee and draft independent contractor agreements to help highlight factors that support independent contractor relationships.