Department of Labor Issues New Rule Regarding Independent Contractors

One of the biggest issues facing companies, especially in the building and remodeling industries, is whether a worker is an employee or an independent contractor. Companies must grant employees different rights and protections than independent contractors, and the company can face penalties for not granting those rights to employees that it believes are independent contractors, in what is known as “misclassification”. Now, there is a new test that will be used by the United States Department of Labor (DOL) when it conducts investigations into potential misclassification.

The DOL issued a new rule that took effect on March 11, 2024, establishing a new, six-point test to determine if an individual is an employee or an independent contractor. The points are:

1. “Opportunity for profit or loss depending on managerial skill.” This point asks whether the worker can meaningfully negotiate their pay for the job provided and if they otherwise act like an independent business. If a worker has a meaningful opportunity to negotiate their pay by job or to decline to accept a job, or if they market themselves to other companies, then they are more likely to be an independent contractor.
2. “Investments by the worker and the potential employer.” If the worker makes investments, such as purchasing tools or equipment that they can use on subsequent jobs for other companies, they are more likely to be considered an independent contractor.
3. “Degree of permanence of the work relationship.” This point asks if the relationship is ongoing with no set endpoint, which suggests an employee relationship, or if it is for a set time or project, which suggests an independent contractor relationship.
4. “Nature and degree of control.” The more that a company controls how the worker completes the work, such as the worker’s schedule and method, the more likely that there is an employee relationship. Notably, this includes “reserved control”, meaning that the DOL will examine if a company can exercise control even if it chooses not to.
5. “Extent to which the work performed is an integral part of the potential employer’s business.” This focuses on whether the job is essential, not the individual. If the job is essential to the business, then any individual who fills it may be an employee.
6. “Skill and initiative.” This point asks if the individual uses specialized skills to complete the work. If the company trains the individual, and particularly if they cannot get that training someplace else, then the individual may be an employee.

The DOL states that these factors are not exclusive, and other circumstances should be considered. However, these points provide a good roadmap for companies to use. This “new” test is similar to the prior test that DOL administered but makes a specific point that if an individual is economically dependent on the business (earning 90% or more of their business from a single entity), that will weigh heavily in favor of reclassification from independent contractor to employee status.

Now is the time for companies to review their relationships with independent contractors and determine if they want to adjust their practices, add individuals as employees, or take other actions to protect themselves from potential misclassification claims. The attorneys at SJJ Law are ready to assist in any way necessary.