New Department of Labor Independent Contractor Rule Announced

In January, the U.S. Department of Labor announced its final rule on classifying workers as independent contractors. The rule will go into effect on March 11, 2024, and replaces a 2021 rule. The DOL’s stated goal in issuing the rule is to combat the misclassification of employees as independent contractors, something that has the potential to “deprive workers of basic rights and protections” such as a guaranteed minimum wage and overtime pay.

This new final rule requires a multi-factor analysis to determine whether an individual is a contractor, properly paid on a 1099 basis, rather than a W-2 employee. The rule sets forth six relevant factors:

• The worker’s opportunity for profit or loss, depending on that worker’s managerial skill

• The investments made by the worker compared to those of the potential employer

• The relative permanence of the working relationship

• The nature and degree of the potential employer’s control over the individual’s work and the working relationship

• The extent to which the work performed is an integral part of the potential employer’s business

• The worker’s use of specialized skill as part of a “business-like initiative”

Ultimately, the objective of this multi-factor approach is to determine whether purported contractors are in business for themselves or, conversely, whether they are economically dependent on the potential employer for work.

The consequences of misclassifying an employee as an independent contractor can be significant. A misclassified worker may be able to recover back wages and benefits afforded to employees (such as paid leave, retirement plans, and health insurance).

This is in addition to potential penalties by the Internal Revenue Service, which maintains its own standards for establishing independent contractor status. In certain circumstances, employers may even face criminal penalties, including up to $1,000 per misclassified employee and jail time of up to one year.

Businesses that engage individuals on an independent contractor basis should be prepared for additional scrutiny in the months ahead, and should be prepared to defend classifications consistent with the analysis prescribed by the new rule. Now is a good time to evaluate existing workplace policies, procedures, and written agreements with workers.