HR's Guide to the DOL's 2024 Independent Contractor Rule

On January 19, 2024, the U.S. Department of Labor (DOL) announced a new rule that will take effect on March 11, 2024, and aims to prevent the misclassification of employees as independent contractors.

This new rule also rescinds the 2021 Independent Contractor Rule and aims to make it easier to classify employees correctly as exempt or non-exempt.

Here’s what HR needs to know about this new rule and how it will affect employee classification.

What is the 2024 DOL Independent Contractor Final Rule?

This rule uses a new six-factor test to determine if a worker is an employee protected under the FLSA or an exempt independent contractor.

The six factors are:

1. Opportunity for profit or loss depending on managerial skill,

2. Investments by the worker and the employer,

3. Permanence of the work relationship,

4. Nature and degree of control,

5. Whether the work performed is integral to the employer’s business, and

6. Skill and initiative.

If a worker is considered to be a non-exempt employee with this test, then they are protected by the FLSA and are entitled to not less than minimum wage and to receive overtime pay, along with other protections.

You can read more about these six factors, along with examples, on the DOL website.

Challenges to the 2024 DOL Independent Contractor Rule

Not everyone is welcoming this new rule, with some freelancers concerned that it will make it more difficult or undesirable for companies to hire independent contractors and may result in workers being pushed into unwanted employment agreements.

Two federal court lawsuits aim to nullify the new rule and stop it from going into effect next month. In the meantime, businesses should consult with legal counsel regarding employee classification compliance concerns.

What is employee misclassification?

Employee misclassification is a serious issue that enables companies to facilitate wage theft and impacts employees’ rights to overtime pay and minimum wage. It is estimated that as many as 30% of businesses currently have misclassified employees.

Misclassifying employees as independent contractors or exempt employees allows employers to avoid paying taxes and insurance as part of payroll, and even makes it easier to fire employees. Not all misclassification is done purposefully – the classification of employees who were originally independent contractors and eventually were hired as full-time employees sometimes gets overlooked.

The potential liability and fines for misclassification (purposeful or not) are not to be taken lightly, and can also include paying for back taxes, lost wages and benefits, and even legal fees – not to mention the resulting damage to a company’s reputation.