A Guide to the New DOL Rule: Employee vs Independent Contractor Status
The rise of independent contractors in the workforce has created a need for improved guidelines on worker classification. To address this, the Department of Labor (DOL) issued a final rule in March 2024 that clarifies how businesses should classify workers under the Fair Labor Standards Act (FLSA).
This new rule is crucial for businesses to understand, as worker classification determines an employee's eligibility for benefits like minimum wage and overtime pay. Misclassifying workers can lead to fines and back payments. Read below for a breakdown of the new DOL rule and how to classify your workers accurately.
The Basics: What is changing with the new rule?
The new DOL rule significantly differs from the more business-friendly 2021 regulations. Previously, determining worker classification focused primarily on the worker's control over their job. The updated rule adopts a broader "totality of circumstances" approach, examining multiple factors to classify workers as employees or independent contractors accurately.
This comprehensive evaluation better reflects the complexities of modern work arrangements, especially for small businesses navigating diverse workforces. Effective March 2024, businesses must now assess the overall employment relationship when making classification decisions.
A Closer Look at the Six Factors: Do Business Owners Need to Reclassify Workers?
The new DOL rule introduces a multifaceted approach to worker classification, requiring businesses to evaluate each worker carefully based on six factors. The DOL states that there is no exact calculation or predetermined weight for each factor. The test is determined by the big picture of the worker's relationship with the business and the work they execute.
Businesses that engage independent contractors should review the classifications under the new rule's six factors:
Opportunity for Profit or Loss: Does the worker have control over their income and expenses?
Independent contractor: Has substantial control over expenses and can earn a profit or incur a loss.
Employee: Typically receives a fixed wage or salary with limited control over expenses.
Investment by the Parties: Who provides the tools and equipment for the work?
Independent contractor: Often provides the tools, equipment, and resources to perform their work.
Employee: Typically relies on the company to provide necessary tools and equipment.
Permanency of the Relationship: Is the work ongoing or for a specific project?
Independent contractor: Often works on specific projects or assignments with no guarantee of continued work.
Employee: Typically has an ongoing relationship with the company, with a reasonable expectation of continued employment.
Degree of Control: Does the business control how, where, and when the work is done?
Independent contractor: Has significant control over how, when, and where the work is performed.
Employee: Typically follows the company's instructions and schedules.
Integral Part of the Business: Is the work essential to the company's core business?
Independent contractor: Provide non-essential services to the business's core operations.
Employee: Performs work that is integral to the business's day-to-day operations.
Worker's Skill and Initiative: Does the worker use specialized skills or rely on the company for direction?
Independent contractor: Often possesses specialized skills and operates independently.
Employee: Typically relies on the company for training and direction.
No single factor is determinative of classification. Businesses should consider all six factors in combination when making a classification decision. The DOL’s Small Entity Compliance Guide comprehensively evaluates the six factors and provides unique examples.
Stay informed about potential updates as the DOL continues to implement the new rule. While the guidelines provide a framework, complex situations may warrant legal counsel. The DOL offers multiple resources to assist businesses in navigating these changes.
By carefully considering the six factors outlined in the rule, small business owners can significantly reduce the risk of misclassification. PayWorks is here to support you. Schedule a free consultation today to learn how our expertise can help your small business stay compliant with the evolving labor landscape.
PayWorks is not providing legal or tax advice. The information on this website is for informational purposes only and should not be relied upon as legal or tax advice. You should consult with your own legal and tax advisors before making any decisions about your financial situation.