On March 11th, the U.S. Department of Labor (DOL) announced a significant change to the independent contractor rule. Ultimately, it impacts businesses because it dictates whether the people on your payroll are classified as workers or independent contractors. This new rule rescinds the previous guidelines and reverts to the traditional six-factor test.
Moving forward, these six guidelines (which we outline in the next section) determine worker status. Ensure your business appropriately classifies your workers under the Fair Labor Standards Act (FLSA). Never hesitate to speak to legal counsel when you have questions.
The new FLSA rule impacts how companies and workers evaluate their working relationships but does not alter other existing laws. The six-factor test examines the totality of circumstances to assess economic dependence and cannot be waived by workers.
The Six-Factor Test for Evaluating Employees & Contractors
You must apply the six-factor test before determining whether someone will be on your payroll as an employee or an independent contractor. Some business owners mislabel people because doing so is in financial interest. As you will soon see, this is not one of the six factors. Before classifying someone, you must thoroughly examine the true nature of your working relationship. The following are the six factors (in bold), and they are verbatim based on what the U.S. Department of Labor has provided:
"Opportunity for Profit or Loss Depending on Managerial Skill"
Consider whether the worker has profit or loss opportunities based on managerial skill. Relevant aspects include the ability to negotiate payment, accept or decline jobs, market their services, and make business decisions like hiring or purchasing equipment. If the worker cannot influence their profit or loss, they would fall under the heading of "employee."
Example: A freelance graphic designer negotiates rates with clients and markets their services online (contractor).
"Investments by the Worker and the Potential Employer"
This factor examines if the worker's investments are capital or entrepreneurial, indicating independent business operation. It compares the worker's investments to the employer's. Small-scale investments relative to the employer's substantial investments indicate employee status.
Example: A freelance photographer who buys their own camera and editing software is likely an independent contractor, while an in-house photographer using company-provided equipment is likely an employee.
"Degree of Permanence of the Work Relationship"
Evaluate the stability and exclusivity of the work relationship. Continuous, indefinite, or exclusive relationships suggest employee status, while project-based, sporadic, or non-exclusive engagements favor independent contractor status.
Example: A consultant hired for a one-time project demonstrates an independent contractor relationship, while a staff member employed indefinitely shows an employee relationship.
"Nature and Degree of Control"
Assess the potential employer's control over the worker's performance and economic aspects. Relevant considerations include setting schedules, supervising work, restricting the ability to work for others, and controlling pricing. More control by the employer indicates employee status, while worker control indicates independent contractor status.
Example: A delivery driver who sets their own schedule and works for multiple companies is likely an independent contractor, whereas a driver with set hours and routes from one company is likely an employee.
"Extent to Which the Work Performed is an Integral Part of the Potential Employer's Business"
Examine whether the work performed is critical to the employer's principal business. Work essential to the business indicates employee status, while non-essential work suggests independent contractor status.
Example: A software developer creating a core product for a tech company is likely an employee, while a developer building a one-time marketing website for the same company is likely an independent contractor.
“Skill and Initiative”
Look at whether the worker uses specialized skills and business initiative. Workers who apply their skills to operate independently and market their services are likely independent contractors. If workers rely on the employer for training and direction, they are potential employees.
Example: An IT specialist who independently secures clients and offers specialized services is likely an independent contractor, whereas an IT employee trained and directed by a company is likely an employee.
The Implications of the New Rule
The return to the six-factor test reinforces the importance of examining the working relationship between workers and employers. No single factor is determinative; all aspects must be considered together. This approach aims to clarify and consistently classify workers under the FLSA.
Speak to Legal Counsel To Ensure Your Classifications Are Accurate
Properly classifying workers is crucial for compliance with labor laws. Misclassifying your employers and contractors results in significant penalties that can be backdated. If you need assistance evaluating your worker classifications or understanding the implications of the new DOL rule, contact Temple Law, PLLC, to schedule a consultation.
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