HR Alert: Independent Contractor/Employee Final Rule Is Out!

On January 9, 2024, the U.S. Department of Labor (DOL) announced their final rule, Employee or Independent Contractor Classification under the Fair Labor Standards Act, to determine whether workers are employees or independent contractors under the FLSA (Fair Labor Standards Act). This is critical information and should be reviewed carefully by any company that uses or tends to use independent contractors (also known as 1099 workers).

What’s the difference between an independent contractor and an employee? Under this rule, the difference can be drilled down to whether the worker is economically dependent on the employer for work. If the worker is economically dependent, then the feds will say that they’re an employee. If the worker is economically independent, they’re an independent contractor.

This regulation eliminates the 2021 Independent Contractor Rule and becomes effective March 11, 2024.

The DOL emphasized that any and all relevant factors should be considered in determining whether a worker is economically dependent on the employer for work. These factors should be considered with a totality of the circumstances analysis, rather than the weighted factors that the 2021 Rule introduced. This means the factors should be analyzed together rather than simply having a bright-line rule that says independent contractors are this and employees are that.

It’s important to note that these factors are neither exclusive nor weighted in any manner. In other words, they’re not a scorecard.

Each factor is independent of one another, and you shouldn’t think that any factor is more important than the rest. The DOL also acknowledged that there are more factors that likely can help your analysis besides the ones it’s provided, and these factors will be looked at on a case-by-case basis. The six factors it identified are simply the most common factors and are provided to help guide you in correctly classifying your workers.

With that in mind, let’s talk about the six factors the DOL provided to help you determine whether you’re hiring an independent contractor or an employee:

Opportunity for Profit or Loss Depending on Managerial Skill

Does the worker determine the payment they receive for the work they provide?

Does the worker have the ability to accept or decline jobs and determine the order and time in which they perform these jobs?

If the answer to either of these questions is yes, the worker is an independent contractor. The questions reflect that the worker’s own management and investment of their work or services determines the profits and losses that they will receive. It’s important to note here that simply choosing to work more hours (if the worker receives an hourly wage) or to take on more jobs (if the worker receives a flat fee payment) doesn’t make a worker an independent contractor.

Investments by the Worker and the Company

Investments by a worker that are capital or entrepreneurial in nature tend to indicate that the worker is an independent contractor. Even if your worker finances the costs of purchasing their own tools or equipment to perform their job, the feds still likely would consider them an employee because purchasing tools required to perform the work isn’t entrepreneurial in nature. For example, if a worker in the construction industry purchases their own hammer, this wouldn’t automatically make them an independent contractor, because the hammer is merely a requirement to perform the labor.

But if a graphic designer purchases their own iMac and the software needed to create lucious public relations or advertising pieces for your company, that would tend to fall into the category of independent contractor. Again, one single characteristic isn’t dispositive, but it helps to paint the picture – and to defend your company in a wage and hour audit.

Degree of Permanence of the Work Relationship

Independent contractors typically have fixed employment periods and move from employer to employer as work becomes available. Employees, however, usually work for a single employer, and their relationship is both continuous and indefinite. Having a seasonal or temporary job doesn’t automatically make a worker an independent contractor. The impermanence of a seasonal job is created because of the operational characteristics of an employer or the industry, rather than the worker’s own business initiative, and because of this, most seasonal workers likely are employees instead of independent contractors.

Nature and Degree of Employer Control

Is the worker free to work without supervision?

If they are, the worker likely is an independent contractor. Nonetheless, where there’s supervision, the supervision doesn’t have to be direct supervision by another person for the worker to be considered an employee. It could be as simple as having electronic systems that verify attendance and manage a worker’s tasks for your company.

Does the worker set their price for goods and services?

If they do, the worker likely is an independent contractor. An employee typically doesn’t tell you that they expect a certain payment for each specific job that they provide while working for you.

Can the worker choose to work for others within the industry?

Independent contractors typically have the ability to work for various employers within a given industry, whereas an employee typically has an exclusive relationship with their employer.

Does the worker have a set schedule in which they report to the employer? (Stated differently, do they punch a time clock?)

If the worker follows a schedule created by the employer, reports their daily work hours to the employer, or faces discipline for not showing up on a specific day at a specific time, that worker is likely an employee.

Extent to Which the Work Performed is Integral to the Employer’s Business

If the work someone’s providing to you is integral to your business, that person likely is an employee. If their work is more peripheral to your business, that person likely is an independent contractor.

The example the DOL shared for identifying whether work is integral to your business is a large farm that grows and sells tomatoes to distributors. The farm pays workers during the harvest season to pick the tomatoes. The workers are employees because picking tomatoes is an integral part of farming tomatoes. At the same time, the tomato farm pays an accountant to assist in filing annual tax returns. The accounting support isn’t central to the principal business of the farm (selling tomatoes); therefore, the accountant is an independent contractor.

Skill and Initiative

The amount of skill required for a worker to perform their services should be taken into consideration. Typically, a specialized skillset to perform work in connection with a business initiative indicates that the worker is an independent contractor. If the work requires no prior experience, the worker is dependent on the employer to receive training to perform the work, or the work requires no training at all, that worker is likely to be an employee.

What Should You Keep in Mind When Hiring Workers

It’s important to ensure that the individuals you hire are being correctly classified as employees or independent contractors. Why is this important? Because if you become the target of a wage and hour audit by either the federal DOL or – in New York – the NYS Department of Labor, the government is going to argue in most cases that your independent contractors are employees.

Why does the government care? It boils down to tax dollars, because both New York and the federal government receive more in employment taxes if you classify workers as employees versus independent contractors. The bottom line for the government is money, so their analysis will often favor employee classifications.

To help you classify workers correctly, here are some key takeaways from this rule to help you determine whether your workers are employees or independent contractors.

In addition, the DOL published FAQs to help answer some common questions.

We at The Coppola Firm are here to help our small [and large!] business clients and colleagues navigate this often thorny and confusing quagmire of employment laws and regulations.

If you need assistance, don’t hesitate to reach out at 716.839.9700 or info@coppolalegal.com. We’re here to help.