The DOL issues new final rule on independent contractor vs. employee status – part two

Businesses Business Owner Employee Tax Limits not filing on time for Independent Contractor vs. EmployeeThe final new rule on employee status substantially resembles the October 2022 publication of the proposed rule. The U.S. Department of Labor’s (DOL) maintains that if an employee is financially dependent on their employer for employment, they are not independent contractors. According to the DOL, until 2021, the rule is consistent with court decisions and interpretive guidelines.

Employee status

The final rule lists explicitly six criteria that will direct the DOL’s examination of whether a person qualifies as an employee for purposes of the Fair Labor Standards Act (FLSA):

  1. The possibility for the employee to make money or lose it based on managerial ability (the absence of such potential suggests employee status)
  2. Investments made by both the employee and the possible employer (if the employee, even on a lower scale, makes comparable types of investments as the employer, it suggests independent contractor status)
  3. The degree of enduring nature of the professional relationship (an exclusive, ongoing, or indefinite relationship implies employee status)
  4. The degree to which the work performed is an essential component of the employer’s business (if the work is crucial, necessary, or central to the main business, the worker is likely an employee)
  5. The type and extent of control exerted by the employer, whether used or just reserved (control over work performance and the financial aspects of the relationship suggest employee status)
  6. The worker’s skill and initiative (if the worker brings specialized skills and uses them in connection with business-like initiative, the worker is likely an independent contractor)

The new test

Unlike the 2021 regulation, every aspect will be considered. A worker’s status won’t be decided by a single component or group of variables alone.

Several changes and clarifications to the proposed rule in the final new regulation exist. For example, it clarifies that an employer’s activities do not imply “control” suggestive of employee status when they are taken only to comply with particular and applicable federal, state, tribal, or local laws or regulations. However, individuals who go above and beyond the call of duty to uphold the employer’s standards for safety, quality assurance, compliance, and contractual and customer service obligations may do so.

The final rule also acknowledges that certain firms, industries, and the employees that work for them may have operational features that are specific to them that make a work relationship less permanent. It is vital to inquire whether the absence of stability results from employees acting on their own initiative as independent contractors. However, the seasonality or temporaryity of work by itself does not always imply the designation of an individual as an independent contractor.

It’s also noteworthy that the component of whether the labor is essential to the firm has been clarified and returned. A non-core element in the 2021 rule asks if the work was part of an integrated production unit. The last new guideline focuses on whether the employee’s labor is necessary for the firm.

Next steps

Unsurprisingly, there have already been court challenges to the DOL’s final new regulation. However, suppose you deal with freelancers and other independent contractors. In that case, you should evaluate your working relationships and make the necessary adjustments. Additionally, remember that each state may have its own requirements. Some of those requirements may be more demanding than the DOL’s final regulation. Contact your employment lawyer with any inquiries concerning the DOL’s new rule. For tax purposes, contact our RRBB advisors. We can help with any questions you may have about your position as an independent contractor.

© 2024


Get free tax planning and financial advice