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New Independent Contractor Rule from the U.S. Department of Labor

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Worker classification is an important issue for employers. Some employers might think that properly classifying a worker as an independent contractor is solely a matter of agreement or convenience. However, there are actually tests that regulating agencies will use to determine whether a worker has been properly classified. Image for illustration purposes
Worker classification is an important issue for employers. Some employers might think that properly classifying a worker as an independent contractor is solely a matter of agreement or convenience. However, there are actually tests that regulating agencies will use to determine whether a worker has been properly classified. Image for illustration purposes
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Texas Business Today – US Department of Labor

By: Mario Hernandez

Legal Counsel to Commissioner Joe Esparza

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Worker classification is an important issue for employers. Some employers might think that properly classifying a worker as an independent contractor is solely a matter of agreement or convenience. However, there are actually tests that regulating agencies will use to determine whether a worker has been properly classified.

One such test is the “economic realities test” used by the U.S. Department of Labor (DOL), and on March 11, 2024 a new rule went into effect regarding how DOL will analyze worker classification issues. Per DOL’s website, the factors of the final rule are the following:

(1) opportunity for profit or loss depending on managerial skill;

(2) investments by the worker and the potential employer;

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(3) degree of permanence of the work relationship;

(4) nature and degree of control;

(5) extent to which the work performed is an integral part of the potential employer’s

business; and

(6) skill and initiative.”

See – https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking/faqs#s7

It should also be noted that in addition to the factors above, other factors could also be considered in the classification analysis if they demonstrate that the worker is truly in business for themself, as opposed to being an employee of an employer.

What’s Changed?

Prior to the new rule, DOL’s analysis of worker classification revolved around two core factors: the nature and degree of control over the work, and the individual’s opportunity for profit and loss. Other factors would be considered if the two core factors were not dispositive of the worker’s classification.

With DOL’s new rule, the focus has shifted away from labeling specific factors as core. Instead, the new rule adopts a totality-of-the-circumstances approach, with no individual factor being assigned a predetermined weight.

For more information on what has changed under the new rule, please visit thefollowing link:

https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking/faqs#s10.

Why is Worker Classification Important?

Improperly classifying workers can have costly consequences for employers. For instance, worker misclassification could result in penalties for the employer, back taxes, and back wages owed.

DOL has a news release page about misclassified workers, which you can visit at thefollowing link:

https://www.dol.gov/newsroom/releases?agency=57&state=All&topic=18210&year=all.

Moreover, DOL is not the only regulating agency that investigates worker classification issues. Other agencies, such as the Texas Workforce Commission and the Internal Revenue Service, have their own worker classification tests and perform investigations to ensure workers are properly classified. For more information on various independentcontractor tests, please visit the following link in our online Texas Guidebook for Employers.

Conclusion:

It should be noted that this article is not an exhaustive review of the topics discussed. It is important for employers to familiarize themselves with DOL’s new independent

contractor rule to help avoid worker misclassification. In fact, DOL has an FAQ pagewith a breakdown of the new rule, which you can visit at the following link:

https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking/faqs. By staying up to date with developments regarding independent contractor tests and rules, employers will be in a better position to avoid misclassifying workers.

Additional Links

DOL webpage: Final Rule: Employee or Independent Contractor Classification Underthe Fair Labor Standards Act, RIN 1235-AA43:

https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking

DOL webpage: Misclassification of Employees as Independent Contractors Under theFair Labor Standards Act: https://www.dol.gov/agencies/whd/flsa/misclassification

Federal Register: Employee or Independent Contractor Classification Under the Fair Labor Standards Act: https://www.federalregister.gov/documents/2024/01/10/2024-00067/employee-or-independent-contractor-classification-under-the-fair-https://www.federalregister.gov/documents/2024/01/10/2024-00067/

Information source: Texas Business Today form Us Department of Labor

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