Department of Labor Revises Independent Contractor Rule

Department of Labor Revises Independent Contractor Rule

January 22, 2024

Does your company have independent contractors? If so, pay attention. On Jan. 10, 2024, the U.S. Department of Labor (DOL) announced a new independent contractor rule (2024 IC Rule). This rule will impact how you classify workers, as either employees or independent contractors, going forward.

How will the new independent contractor rule affect you?

The new rule will affect a wide range of businesses large and small. It applies to workers in all industries.

According to the rule, employers must consider the following six factors before classifying a worker as an independent contractor:

  1. The worker’s opportunity for profit or loss
  2. The resources the worker has invested in the work
  3. The degree of permanence involved in the working relationship
  4. The degree of control the employer has over the worker’s activities
  5. The extent to which the work performed is essential to the employer’s business
  6. The worker’s skill and initiative

No single factor has predetermined weight in the eyes of the DOL, and no single factor can determine whether a worker is properly classified as an employee or an independent contractor. In addition, other factors may be relevant based on the unique circumstances of the worker and the working relationship.

Generally, the key question to consider is whether a worker is economically dependent on the employer, as they would be under the Fair Labor Standards Act (FLSA). If someone is in business for themselves, it tends to support a finding of independent contractor status.

Can a worker waive their right to be classified as an employee?

Whether a worker is an employee or an independent contractor is based on a legal analysis. A worker cannot waive their status, even by the terms of a written agreement with their employer.

How is the 2024 IC Rule different from the previous rule?

The 2024 IC Rule rescinds a prior rule from Jan. 7, 2021. The 2021 IC Rule was a short break from longstanding opinions about classification distinctions. In summary, the 2024 IC Rule changes the interpretation of worker classification in the following ways:

  • It returns to a “totality-of-the-circumstances” analysis of worker classification. This is a more holistic way of analyzing the economic realities of a worker’s situation.
  • It considers the resources a worker has invested in their services as a separate factor.
  • It considers scheduling, remote supervision and a worker’s ability to set their own prices.

In overturning the 2021 IC Rule, the 2024 IC Rule has reinstated decades-long precedent interpreting the FLSA.

The 2024 IC Rule will bring judicial decisions back into line with case law released before the 2021 IC Rule. As employers and their counsel look to verify that their worker classifications comply with the law, the 2024 IC Rule will provide greater clarity.

When does the 2024 IC Rule take effect?

The 2024 IC Rule is set to take effect on March 11, 2024. The effective date comes after a comment period in which the DOL’s Wage and Hour Division considered feedback from various stakeholders. These include businesses, attorneys and special interest organizations.

Why did the DOL pass a new rule?

Acting Secretary of Labor Julie Su has identified worker misclassification as a serious problem within the labor force. She has stated that misclassifying employees as independent contractors “deprives workers of basic rights and protections.”

The purpose of the new rule is twofold:

  • To provide guidance on proper classification for employers
  • To combat worker misclassification, which negatively impacts workers’ rights to minimum wage, overtime pay, health insurance and other employment benefits

What are the limitations of the new rule?

While the 2024 IC Rule applies to all employers regardless of size, it only applies to worker classification under the FLSA. The Internal Revenue Code (IRC) and National Labor Relations Act (NLRA) maintain different standards and have separate case law regarding the difference between employees and independent contractors. The FLSA is interpreted by the DOL, while the IRC and NLRA are interpreted by separate federal agencies.

You should also keep in mind that your state may offer worker protections beyond the provisions of the FLSA. If a state you operate in has a law that provides greater protection than the FLSA, those standards will prevail in matters of overtime pay, minimum wage or similar worker protections.

Still have questions about the 2024 IC Rule? Contact your benefits advisor or legal counsel

Businesses of all sizes, in all industries and in all geographic locations in the U.S. must comply with the 2024 IC Rule. If you employ independent contractors or will in the future, keep an eye on the classification process used to designate your workers’ status.

Reach out to your benefits adviser or legal counsel for guidance.

//