Independent Contractor Misclassification and Compliance News March 2024

As the independent workforce continues to grow, so do the issues of worker compliance and misclassification. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics. Each month, we’ll bring you the latest news stories from around the web.

1. DOL New Independent Contractor Rule Takes Effect

The United States Department of Labor (DOL) issued a new rule that became effective on March 11, 2024. Despite warnings of the zombie apocalypse, the new independent contractor rule became effective and set forth the DOL’s interpretation of 70 years of case law.

Both the new rule and the old rule said the appropriate test for determining if a worker is an employee or independent contractor was the economic realities test—not the common law test used by the IRS, or the ABC test recently adopted in California. In addition, the new rule and the old rule agree that a worker is an independent contractor if the worker is, as a matter of economic reality, in business for themselves. For both rules, the question is whether the worker is in business for themself. The difference arises in the weight given to the factors that should be considered.

The new rule establishes six factors that should be considered, and each factor is even equal in weight. No single factor is determinative and the “totality of the circumstances” controls. The factors are:

1. Opportunity for profit or loss based on managerial skill.

2. Investments by the worker and the potential employer.

3. Degree of permanence of the relationship.

4. Nature and degree of control.

5. Extent to which the work performed is an integral part of the potential employer’s business.

6. Skill and initiative.

Moreover, additional factors may be considered if they are relevant to the overall question of economic dependence. The old rule said that there were two core factors: control and opportunity for profit or loss. The other factors could be considered only if the core factors did not determine the result.

With the change, there have been many articles saying the new rule is a war on freelancers and the new rule is disastrous for independent contractors, but missing from most of these articles are concrete examples of workers who would be independent contractors under the old rules but classified as employees under the new rule. For there to be a change in classification due to the new rule, three things would need to occur:

1. A worker has control over the work (old rule core factor);

2. A worker has an opportunity for profit or loss (old rule core factor); AND

3. The consideration of other factors (skill and initiative, permanence of the relationship, work is integrated into the employer’s business, and investment in the business) outweighs the facts that the worker has control of the work and has an opportunity for profit and loss.

This scenario is unlikely. The opportunity for profit and loss factor often considers skill/initiative and investment, and the factor of control often considers the permanence of the relationship and integration of the work in the employer’s business.

There may be some cases where (i) the work demonstrates control over the work despite being a permanent relationship and having the work highly integrated into the employer’s business and (ii) the worker has an opportunity for profit and loss despite not exercising any skill or initiative or investing in the business, but those scenarios are not common. It is not likely that the new rule is going to result in the reclassification of many workers.

2. NLRB New Joint Employer Rule is Vacated

The National Labor Relations Board (NLRB) issued a new rule for determining when an employer is considered a joint employer under the National Labor Relations Act (NLRA). The proposed rule made it more likely that an employer would be a joint employer.

Particularly in the case of a staffing firm, the ultimate client would more likely be considered the employer of a temporary employee of the staffing firm for labor law purposes. The joint employer rule is of interest to companies who engage with independent contractors because if/when an independent contractor alleges that they are an employee, the joint employer rule may affect who the employer or employers are.

Just before the rule was to take effect, a federal judge vacated the rule saying that the rule was too broad and would consider a company an employer even if it lacked meaningful control over the workers. The NLRB is reviewing and considering its next steps.

For more information, check out our resources page on misclassification and compliance. If you have any questions about engagement, classification, or management of your independent workforce, we’re always here to help.