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New Rules for Contractor vs. Employee Classification

Matthew S. Veech

by Matthew S. Veech

Robert Arthur

by Robert Arthur

February 29, 2024

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Changes are ahead for contractor vs. employee classification. A new rule has been announced regarding the classification of individuals as independent contractors. Employers may find it difficult to properly classify workers as independent contractors or employees due to these changes. The Department of Labor (DOL) independent contractor rule involves a new test with a different approach to classify workers, which could present challenges. Businesses should be prepared to adapt to remain compliant.

Independent Contractor vs. Employee Status: Benefits and Drawbacks

The gig economy is one in which companies rely heavily on independent contractors rather than employees. Classifying an individual as an independent contractor (or a “gig” worker) means the individual is not an “employee” and does not receive the same benefits and protections an employee would. For example, independent contractors generally do not receive health insurance or retirement plans and do not receive the same legal protections like minimum wage, unemployment, anti-discrimination, and workers’ compensation benefits.

At the same time, hiring an independent contractor rather than an employee can have major benefits for employers and employees alike. Employers save time, money, and effort in securing and employing a labor force while independent contractors maintain flexibility and control over their work.

What’s Changed — A New Test Determines Status

The DOL independent contractor rule announced by the Biden Administration regarding the classification of individuals as independent contractors will go into effect on March 11. It will likely prompt legal challenges for contractor versus employee classification. However, if it goes into effect as planned, businesses that rely on contract labor should be prepared to adapt.

The prior rule applied the traditional economic realities test to determine whether an individual was an independent contractor. It looked at whether the individual was economically dependent on the hiring entity and, ultimately, an employee of the company. It applied several factors including the nature and degree of the individual’s control over their work, the individual’s opportunity for profit or loss, the amount of skill required for the work, the degree of permanence of the working relationship, and whether the work is part of an integrated unit of production. The first two points—the individual’s control over the work and opportunity for profit and loss—were key to the analysis whether an individual would be classified as an independent contractor or employee.

Factors for the New Test Address Control, Opportunity

The new administration has shifted to a “totality of the circumstances” approach to determine worker status. This test focuses primarily on two factors to determine the difference between an employee and independent contractor: 1) the control exercised over key aspects of the work; and 2) the opportunity for profit or loss. Importantly, the new rule also allows “additional factors” to be considered if they are relevant to the “overall question of economic dependence.”

Challenges Ahead For Businesses Engaging Independent Contractors

Unfortunately, this new rule creates a lot of confusion and uncertainty over how to classify independent contractors and employees. Independent contractors are crucial to many industries including the construction and oil and gas industries. Going forward, businesses will find it difficult to properly classify workers as independent contractors or employees due to these changes. If you are a business that engages independent contractors, you should consult an attorney to help navigate the new rules, avoid misclassification of employees and ensure you are in compliance.

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