Is Your Contractor Really an Employee? What the 2024 DOL Rule Says

Misclassifying a worker as an independent contractor can come at a huge cost to your organization. I’m talking huge to the tune of millions in some cases. With the recent U.S. Department of Labor (DOL) rule on independent contractor classification, the risk of misclassification could be even higher.

On March 11th, 2024—

The DOL’s final rule revising the guidance on independent contractor classification under the Fair Labor Standards Act (FLSA) adopts a six-factor test to determine if the worker has an economic dependency on the employer or if they are an independent contractor. Under this rule all six factors will be considered with the same weight, relying on a totality of the circumstances where no single factor is determinative.

so, what are the 6 factors?

1. Opportunity for profit or loss based on managerial skill

Does the worker have an opportunity for profit or loss based on factors such as business acumen or judgment? If not, they’re more likely to be classified as an employee and not an Independent Contractor.

2. Investments by the worker and the potential employer

This factor considers whether the worker’s investments are capital or entrepreneurial in nature. If the investments of the worker serve a business-like function and suggest that the worker is operating independently, that would indicate independent contractor status.

3. Degree of permanence of the relationship

If the work relationship has a definite duration, is project-based, or is non-exclusive, that tips in favor of the worker being classified as an independent contractor. If the work is indefinite in duration, continuous, or exclusive, then that tips in favor of the worker being an employee.

4. Nature and degree of control

If the employer has more control, that favors employee status. If the worker has more control, that favors independent contractor status. Relevant examples of control include setting the worker’s schedule, supervision of performance, and control over economic factors such as rates and services provided.

5. The extent to which the work performed is an integral part of the potential employer’s business

If the work being done is critical to business functioning, that favors employee status. If the work being done is not critical or central to business function, that favors independent contractor status.

6. Skill and initiative

Both employees and independent contractors may use specialized skills to perform the work they’re tasked with. If the worker does not have specialized skills or depends on training from the employer, that’s indicative of an employee. If the specialized skills are used with a business-like initiative, that indicates the worker is an independent contractor.

Additional factors may be relevant if they are able to determine whether the worker is economically dependent on the employer for work (employee) or if they are in business for themselves (independent contractor). If you’re an employer who utilizes the skillsets and talent of independent contractors, complying with federal and state guidelines is crucial to avoid the risks of misclassification. 

The good news is you don’t have to do it alone. Populus Group's Supplier Compliance program offers the support you need to mitigate misclassification risks. Our team of experts are ready to partner with you, taking a consultative approach to help avoid costly risks and get the talent you need in the door.