Updated Worker Classification Rules Which May Affect Freelance Businesses

New Guidance on Employee vs. Independent Contractor Status from the Department of Labor Takes Effect March 24, 2024

The U.S. Department of Labor (DOL) has introduced the Final Rule on Employee or Independent Contractor Classification, which was published in the Federal Register on January 10, 2024. This critical update aims to help employers correctly classify workers under the Fair Labor Standards Act (FLSA). It's important to note that proper classification is essential because an employee is entitled to specific wage and hour protections not afforded to an independent contractor.

Rule to Take Effect on March 11, 2024

The Final Rule, effective March 11, 2024, revokes the prior rule and realigns with judicial precedent. Despite possible legal and congressional challenges, employers have a narrow window of 60 days to assess and ensure their workforce is correctly classified according to the new guidelines.

Understanding the U.S. DOL's Final Rule

The Final Rule employs a comprehensive analysis based on six factors, with no single factor being decisive. These factors are:

• Opportunity for Profit or Loss: The potential for a worker to earn profits or suffer losses based on managerial skill -  A worker's ability to impact their earnings through decisions and management of their work could suggest they are a contractor.
• Nature and Degree of Control: The extent of the potential employer's control over the work. - If the employer is directing work schedules and supervising tasks, the worker is likely an employee.
• Degree of Permanence: The duration and exclusivity of the work relationship. - A long-term or indefinite relationship suggests employee status, while short-term engagements suggest independent contractor status
• Integral Part of Business: Whether the work is a central aspect of the employer’s business. - If the work is essential to the business, it implies the worker is an employee.
• Skill and Initiative: The level of specialized skills and initiative required from the worker. - A need for training or lack of specialized skills indicates an employee status.
• Investment by Worker: The worker's investment in their work relative to the employer's investment.

Note: The rule clarifies that these are the primary factors, but other considerations may be relevant to determine economic dependence in specific situations.

Misclassifying a worker can have serious financial implications for a business, including but not limited to owing back taxes to the IRS, owing state unemployment taxes, and possibly owing back wages for unpaid minimum wage and overtime. It is important to note that each state may have their own guidance and independent rules which may be more extensive than the federal regulations so be sure to check with any relevant state departments as well.