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Independent Contractors vs Employees: A Guide to the New Rule

New Rule Takes Effect March 2024: Independent Contractors vs Employee

By Jeanette Coleman, SPHR & SHRM-SCP on Jan 18, 2024
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On January 9, the U.S. Department of Labor (DOL) announced its final rule, redefining which workers should be classified as independent contractors vs employees. The agency’s interpretation of the Fair Labor Standard Act’s (FLSA) Classification provision takes effect on March 11, 2024. 

Under the FLSA, employees are entitled to minimum wage, overtime pay and other benefits. While independent contractors are not entitled to these benefits, they have greater freedom to set their schedules and perform work for more than one company. 

Six-Factor Totality of the Circumstances

This final ruling rescinds and replaces the 2021 Independent Contractor Rule. It largely mirrors the agency’s October 22 proposed rule, adopting a six-factor, “totality-of-the-circumstances” framework for analyzing worker-employer relationships. The DOL will consider these six factors, weighing each one equally, when examining the relationship between a worker and an employer and determining independent contractor vs employee classification. 

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The six factors are: 

1. The Worker’s Opportunity for Profit or Loss

This factor considers whether the worker can make or lose money based on their ability to manage their work, including their own judgment and business skills. This factor leans in favor of independent contractor status if the worker can: 

  • negotiate the pay rate, 
  • accept or decline work the employer offers, 
  • independently manage the timing of work and  
  • choose the order of work performed. 

2. Investments Made by the Worker and Employer

This factor considers whether the worker or the employer has invested money or resources in a way that resembles a business investment or a more typical worker’s investment. Significant investments in equipment or other tools that help a worker perform work for multiple companies may indicate that the worker is an independent contractor vs employee. 

3. Degree of Permanence of the Working Relationship

If the worker is hired on an as-needed or project-specific basis, is in business for himself/herself and performs work for several companies, then this factor supports a finding of independent contractor. 

4. Nature and Degree of Control Over Work Performance

When the employer determines the worker’s work schedule, directly supervises how the work is carried out or restricts the worker’s ability to work for other employers, the worker may be considered an employee. 

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5. Extent to Which the Work Performed Is an Integral Part of the Employer’s Business

The worker may be an independent contractor if the specific tasks performed are not critical to the overall functioning of the employer’s business.  

6. Use of the Worker’s Skill and Initiative

If the worker uses specialized skills to perform the work and if those skills resemble those required to manage a business rather than simply performing a job, this factor supports classifying the worker as an independent contractor, not an employee. 

As used in this rule, the term “independent contractor” refers to workers who are not economically dependent on the employer for work and are in business for themselves. Such workers may be referred to by different names, including independent contractors, freelancers, gig workers and self-employed. 

HR for small business

Fewer Workers May Be Classified as Independent Contractors vs Employees in 2024

It’s possible that fewer workers can be classified as independent contractors under the DOL’s new rule than was the case under the old rule. As with many employment regulations, interpreting the requirements can be confusing, and missing the mark can be costly. Misclassifying employees can result in fines and a requirement to pay unpaid back overtime. Small businesses are particularly at risk because they often don’t have the staff to deal with compliance. 

RELATED: How to Know If Remote Workers Are Actually Working >>

Axcet HR Solutions

Don't navigate these complex changes alone. Axcet HR Solutions is here to guide you through every step of the process. As seasoned HR compliance experts, we specialize in helping small businesses like yours accurately apply the six factors in the new rule to ensure correct worker classification. Avoid costly mistakes and gain peace of mind; schedule a consultation with our knowledgeable team at Axcet HR Solutions today. Let us help you smoothly transition into the new regulatory landscape and protect your business.

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