Is Your Company Compliant with the Final Ruling on Independent Contractor Classification?

Just when you thought the 2021 Independent Contractor Rule was the be-all, end-all, along comes another rule set to replace it. In an abundance of caution, the new ruling is purported to reduce the risks that employees are misclassified as independent contractors, while providing greater consistency for businesses and upholding longstanding case law on the matter.  

The determination of whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA) has been subject to interpretation for decades, exacerbated by the rise in the number of freelancers in the United States. Workers classified as employees are entitled to minimum wage, overtime, and other wage and hour protections not applicable to independent contractors. Companies struggle to interpret the many Federal, state, and municipal “classification tests” that might be applicable in any situation.  

The ”2021 Final Rule” attempted to simplify the evaluation process by focusing on two “core factors” that measure the level of control exerted by the employer and the worker’s opportunity for profit or loss. However, lack of clarity in terms of how to determine level of control led to more confusion and potentially elevated levels of risk for employers who inadvertently misclassify workers. 

The Department of Labor (DOL) has now issued the “2024 Final Rule”, effective March 11, returning to six factors of equal weight.  

Supporters of the 2024 Final Rule point to the level of rigor, enabling a more realistic evaluation of all nuances of independent contractor usage. Detractors express concern regarding the level of complexity associated with interpreting the six factor criteria for independent contractor status. Employers may find it challenging to navigate the nuanced requirements, potentially resulting in misclassification and legal consequences.  

According to the Federal Register, the 6 Factor Test includes:  

1. A worker’s opportunity for profit or loss depending on managerial skill.  
2. Investments made by the worker and the employer.  
3. Degree of permanence of the work relationship.  
4. Nature and degree of control over performance of the work.  
5. Extent to which the work performed is an integral part of the employer’s business.  
6. Use of the worker’s skill and initiative.  

nextSource Insights 

It’s clear that companies must audit their workers deemed independent contractors and do it quickly to avoid misclassification penalties using the most rigorous requirements.  

• It’s important to realize that the 6 Factor Test is not all-inclusive. Under the final 2024 rule, added factors may be relevant in determining whether the worker is indeed an independent contractor for purposes of the FLSA. For example, if the factors show whether the worker is in business for themself, as opposed to being solely relying on the potential employer for work. This guidance is identical to the direction provided in the 2021 Independent Contractor Rule, and it’s also consistent with judicial precedent. 
• Due to the complexity of this ruling, you may want to consider outsourcing the classification to a company that provides independent contractor consulting services. At nextSource, as a best practice we evaluate workers against a combination of the Federal standard as well as applicable state or local standards, ensuring rigorous evaluation and significantly mitigating the risk of misclassification. 
• If workers fail to classify as an independent contractor, and compliance is not possible, you may want to consider an Employer of Record (EOR) solution which is a third-party organization that serves as the legal employer for a temporary worker on behalf of another company. Examples would include out-of-state workers, outsourced workers for ongoing projects, or specialized skills for a specific project.