On January 10, 2024, the U.S. Department of Labor published a new Independent Contractor rule which rescinds the Independent Contractor Rule of 2021. The new rule provides new guidance on how to analyze whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The new rule includes six (6) factors when determining the worker relationship whereas the 2021 Independent Contractor rule listed five (5) factors, but singled out “core factors” among them which were given more weight. Under the new rule, the six (6) factors include (with equal weight):
- Whether the work is an integral part of the employer’s business (e.g., this factor weighs in favor of the worker being an employee if the work is critical, necessary or central to the employer’s principal business);
- The worker’s opportunity for profit or loss depending on managerial skill (e.g., whether the worker engages in marketing or other efforts to expand the business, makes decisions to hire others, purchases materials and equipment. If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee);
- The extent of the relative investments of the workers and the employer (e.g., is the worker making similar types of investments as the employer (even if on a smaller scale) which would suggest that the worker is operating independently and would indicate independent contractor status);
- Skill and initiative (this factor indicates employee status where the workers does not use specialized skill in performing the work or where the worker is dependent on training from the employer to perform the work).
- The permanency of the work relationship (the worker is most likely an employee if the work relationship is indefinite in duration, continuous or exclusive of work for other employers); and
- The nature and degree of control exercised or retained by the employer (the employer’s degree of control over the performance of the work, e.g., sets work schedule, supervises the performance of the work or limits the worker’s ability to work for others. According to the DOL, actions taken by the potential employer that go beyond compliance with a specific, applicable Federal, State, Tribal or local law or regulation and instead serve the potential employer’s own compliance methods, safety, quality control or contractual or customer service standards may be indicative of control. More control by the employer favors employee status; more control by the worker favors independent contractor status).
The new rule is intended to reduce the risk that employees are misclassified as independent contractors. When a worker is classified as an employee, the employer must withhold income taxes as well as Social Security and Medicare (FICA) taxes from the employee’s paycheck. The worker and the employer each contribute 7.65% of the worker’s pay to pay the FICA taxes. When a worker is classified as an independent contractor, the worker is responsible for remitting income tax and for the entire FICA tax. Incorrectly classifying a worker as an independent contractor can lead to unpaid employment taxes, I-9 violations, failure to pay unemployment insurance tax and failure to provide statutory benefits and pay to which an employee may be entitled.
The new rule is effective on March 11, 2024; however, the rule may be challenged in court. More information can be found HERE.
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