The U.S. Department of Labor recently announced that a new final rule will go into effect March 11, 2024, addressing whether workers are employees or independent contractors. The new rule “returns to a totality-of-the-circumstances analysis” in which the contractor/employer relationship is considered “in view of the economic reality of the whole activity.” The change in the rule means that businesses currently using independent contractors could be subject to adverse tax consequences and possible legal liability if individuals working in the business are deemed to have been misclassified.
Notably, in creating the new rule, the Department of Labor has instructed that “costs that are unilaterally imposed are not indicative of a worker’s capital or entrepreneurial investment.” Accordingly, the fact that a worker is free to elect to work more or less or the fact that they use their own vehicle or other tools to accomplish tasks for the business may not determine whether they are an independent contractor or an employee.
Instead, the new rule emphasizes that “economic dependence is the ultimate inquiry, meaning that a worker is an independent contractor as opposed to an employee under the Act if the worker is, as a matter of economic reality, in business for themself.”
The six economic reality factors to be considered in evaluating economic dependence are:
- opportunity for profit or loss depending on managerial skill (not merely based on whether employee chooses to work on a particular day);
- investments by the worker and the potential employer (defined specifically as the worker’s investment in capital and other strategic resources for their business);
- the degree of permanence of the work relationship (how regularly and how long the worker has been engaged by potential employer; whether the worker is free to work for others; etc.);
- the nature and degree of control (whether the worker sets the terms of their own engagement or has them imposed by the potential employer);
- the extent to which the work performed is an integral part of the potential employer’s business (whether the employer’s business can survive without the contributions provided by the worker); and
- skill and initiative (e.g., whether the worker has a unique skill or has been trained to perform by the potential employer).
Additional factors may also be considered if they are relevant to the overall question of economic dependence.
The new rule is found at 29 CFR 795.100 et seq. Please contact K&H if you have questions about how this change may impact your business.