New Rule Defines 'Independent Contractors' And 'Employees'; All You Need To Know

The US Department of Labor recently introduced a rule, redefining standards for employees and independent contractors. The DOL revised its interpretation of the Fair Labor Standards Act’s classification provision and it is set to make it harder for companies to treat workers as independent contractors, to help more workers get benefits. Millions of workers such as janitors, home-care workers, construction workers, and truckers are set to benefit from the rule as they could be considered employees under the new rule which will be effective from March 11.

What is the New DOL Rule

The parameters to determine a worker as an “independent contractor” or an “employee” have been hotly debated in the area of the law. The DOL has changed the definition of the terms over time.

The final rule published in January rescinds the former employer-friendly guidance that had been in effect since January 2021. While the former guidance made it easier to define a worker as an independent contractor, the new rule makes it difficult for employers to classify workers as independent contractors to save money. The new rule has outlined six factors that help define a worker in either of the two categories.

The six key factors that carry equal weight are

1. “Opportunity for profit or loss depending on managerial skill.” This considers if the worker can perform certain functions like meaningfully negotiate the pay for the work, accept or decline jobs, etc.

2. “Investments by the worker and the potential employer.” Under this, if the worker makes “capital or entrepreneurial” investments, in equipment, software, marketing services, and more, which help the worker to work for multiple companies, then they will be considered as independent contractors.

3. “The degree of permanence of the work relationship.” This says that a worker may be an independent contractor if they are not hired indefinitely but are hired for a fixed period, or a project, or sporadically, which means the worker is in business for themselves, according to The National Law Review.

4. “The nature and degree of control.” Under this, a worker may be defined as an independent contractor if the worker controls their schedule, is not supervised, and is not explicitly restricted from working for others.

5. “The extent to which the work performed is an integral part of the potential employer’s business.” This is a crucial factor that says a worker may not be classified as an independent contractor if the work done by them is an integral part of the business.

6. “Skill and initiative.” In this, a worker may be an independent contractor if they bring specialized skills that they use for marketing purposes to generate new businesses or obtain from other companies.

The DOL has mentioned that some “additional factors" can also be considered, but it hasn’t specified what those are. Furthermore, companies that willfully violate the new rule could be criminally prosecuted and they may face up to $10,000 in fines.

Benefits of the New Rule

According to a NextAvenue report, the new rule aims to correct worker misclassification, which has been a problem for decades. Companies often classify workers as contractors to avoid giving them benefits or paying contributing taxes.

"Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections," Acting Secretary of Labor Julie Su stated in an official DOL press release.

A DOL spokesperson said that in the fiscal year 2023, about 600 employers were investigated by the DOL over misclassifying 23,000 workers as independent contractors, which resulted in the workers receiving $13 million in back wages, as per the NextAvenue report.

Workers like in-home caregivers and construction workers were at high risk of misclassification. However, there has been major pushback from several unions and institutions citing that it would hinder independent workers and deprive them of the flexibility they enjoy. 

Senator Dr. Bill Cassidy, introduced a Congressional Review Act (CRA) resolution with an aim to overturn the DOL's rule just a week before it takes effect. The US Chamber filed a coalition lawsuit alleging that the rule creates uncertainity and employee bias.