Employee or Independent Contractor? DOL Issues New Guidance

Whether a worker is classified as an employee or independent contractor has significant legal and financial implications. As employees, workers are entitled to a variety of legal protections, including those created by wage and hour, antidiscrimination, family and medical leave, unemployment insurance, and workers compensation laws. Independent contractors, on the other hand, lack many of these protections.

Because of the substantial requirements associated with hiring employees, correctly classifying workers is a core part of complying with state and federal employment and tax laws. Unfortunately, whether a worker is properly classified as an employee or independent contractor is often not a simple question. In January 2024, the U.S. Department of Labor issued new guidance for classifying employees under the Fair Labor Standards Act, which establishes federal minimum wage, overtime, and child labor requirements.

What does the new DOL rule say?

The rule articulates a six-factor test to determine whether a worker can be properly classified as an independent contractor. These factors are to be considered together, with no single factor carrying more weight than another, to determine wither a worker is, as a matter of economic reality, dependent on the employer for work. If so, they should be classified as an employee.

Employers should consider these six factors when classifying their workers:

Opportunity for Profit or Loss Depending on Managerial Skill

If a worker has the opportunity for profit or loss based on their initiative, judgment, or business acumen, this suggests they may be an independent contractor. The following are some of the factors the DOL states may be relevant in making this determination:

• Whether the worker can meaningfully negotiate their rate of pay
• Whether they can accept or decline jobs as they choose
• Whether they engage in efforts to expand their business or secure more work
• Whether they hire others, purchase equipment, or pay for their own office space

Relative Investments by the Worker and Employer

This factor considers the extent to which the worker makes capital or entrepreneurial investments to support the growth of their business. If a worker isn’t making investments that support their ability to work independently in their field, then they are more likely to be considered an employee.

Nature and Degree of Control over the Worker

If an employer sets a workers’ schedule, supervises their performance, or explicitly limits their ability to work for others, this suggests the worker is an employee rather than an independent contractor. Additionally, if the employer unilaterally controls the rate of pay, reserves the right to discipline the worker, or requires specific training or other qualifications beyond what it must impose to comply with applicable laws, it’s more likely the worker should be classified as an employee.

Degree of Permanence of the Work Relationship

Work relationships that are project based or of limited duration are more characteristic of independent contractors than employees. However, the DOL is careful to note that a temporary work relationship, in itself, doesn’t necessarily weigh on the side of a worker being an independent contractor. The impermanence must be a result of the workers’ independence as a business person rather than a temporary or seasonal need of the employer.

Extent to Which the Work Is Integral to the Employer’s Business

A worker is more likely to be classified as an employee if the work they perform is central to the employer’s business. For example, an agricultural business that hires help to harvest its produce is likely hiring employees rather than contractors because harvesting is integral to the agriculture business. However, the same company might hire independent contractors to file its tax returns or provide legal advice.

Skill and Initiative

Those who use specialized skills to perform their work and do not rely on an employer for training are more likely to be considered independent contractors. Merely possessing such skills and applying them to the work isn’t enough to create independent contractor status, however. Workers who use those skills in a way that supports business initiative, such as to market themselves to a variety of clients, are more properly classified as independent contractors.

What has changed with the new rule?

The 2024 rule rescinds a similar rule enacted in 2021, which gave greater weight to two of these six factors (control over the worker and opportunity for profit or loss), designating them “core factors” in determining proper worker classification. Additionally, the 2021 rule did not allow consideration of whether work is integral to the employer’s business when making this determination. The 2024 rule establishes a “totality of the circumstances test,” where all six factors are to be considered without giving any of them more weight than the others.

Why did the DOL make this change?

The DOL states that the 2021 Independent Contractor Rule departs from interpretations of the Fair Labor Standards Act that have been established by decades of judicial precedent, creating confusion and disruption for businesses and workers. In response, the agency sought to codify existing case law to create consistency and predictability and to allow consideration of all relevant factors when classifying workers. The new rule is scheduled take effect March 11, 2024.

Is this the only test that applies to the classification of New Jersey workers?

No. New Jersey has its own “ABC” test that must be used when determining whether New Jersey workers are employees or independent contractors under the state’s unemployment compensation law. To be considered an independent contractor under this test, a worker must meet all of the following requirements:

• Has been and will continue to be free from control or direction over their work performance
• Performs work that is outside the usual course of business or outside all the places of business of the employer
• Is customarily engaged in an independent trade, occupation, profession, or business

Because different tests apply at the federal and state level, it is possible that workers may fall into different classifications in different contexts. Employers that are unsure whether they may treat workers as independent contractors should consult an attorney with expertise in employment law for guidance.

Legal Advice for New Jersey Workers & Employers

Whether you’re a worker or an employer, the employment attorneys at the Mark Law Firm can help you cut through the confusion that can surround worker classification. If you believe you’ve been improperly classified as an independent contractor, we can help you enforce your rights as an employee. If you’re hiring others for your business, we can help ensure you’re complying with both state and federal laws when classifying your workers. Learn more about working with us on our FAQ page, or subscribe to our blog to stay up to date with our latest articles.