U.S. DOL Won't Apply 2024 Independent Contractor Rule to Determine Worker Classification

The U.S. Department of Labor will no longer apply the 2024 Independent Contractor Rule in determining worker classification – employee or independent contractor. The agency, instead, instructs field staff in a Field Assistance Bulletin (FAB) with instructions to use previously established guidance that reflects the current administration’s position on determining classification for protections under the Fair Labor Standards Act (FLSA).

The announcement doesn’t change the fact that the 2024 rule remains in effect. The rule will remain in effect until the current administration takes steps to rescind or replace the 2024 rule through the formal rule-making process or the rule is impacted by one of the ongoing lawsuits challenging the validity of the 2024 rule.

So, there is a rule, but the U.S. DOL has instructed field staff not to apply it when determining a worker’s classification while conducting investigations under the FLSA.

With the potential for employee lawsuits for non-compliance under the 2024 rule, employers should comply with existing laws that have established criteria for classifying workers at the federal, state, and local levels.

What Is the U.S. DOL's Final Rule on Worker Classification?

The final rule uses a totality-of-the-circumstances analysis that considers six factors, giving no individual factor predetermined weight. The factors include:

• Opportunity for profit or loss depending on managerial skill*
• Nature and degree of control*
• Degree of permanence of the work relationship
• Work performed is an “integral” part of the potential employer’s business
• Specialized skill and initiative
• Relative amount of investment of capital or entrepreneurial effort by the worker compared to investment by potential employer

*These were the core factors that were given more weight under the previous 2021 rule.

The rule also indicates that additional factors could possibly be used if they in some way illustrate the economic dependence between a worker and potential employer.

Explanation of Factors Used in Determining Worker Classification

The opportunity for profit or loss factor looks at how a worker’s managerial skill impacts their economic success or failure in performing the work. Examples include the worker negotiating what they will charge for the work, engaging in marketing or advertising, and having the power to accept/reject jobs, hire talent, purchase materials, rent space, etc. If a worker has no opportunity for a profit or loss, then they could be an employee.

Under the nature and degree of control factor, if, for example, the potential employer sets workers’ schedules, supervises the work, oversees any discipline required, then indications are that the individuals being scheduled and supervised are employees.

In considering the degree of permanence factor, a continuous, indefinite, or exclusive work relationship would indicate employee status, while a more project-based or non-exclusive relationship could indicate independent contractor status.

If the work performed is critical or central to the potential employer’s principal business, then it is an integral part of the employer’s business, and this factor leans toward the worker being an employee. Conversely, if work performed is not critical or necessary, this factor would weigh toward the worker being an independent contractor.

When reviewing the skill and initiative factor, if a worker needs training or is applying no specialized skills to perform the work, then the indication would be that their status is an employee.

Note: The Final rule only applies when determining worker classification under FLSA.

Do Employers Have Additional Worker Classification Requirements?

In addition to the federal regulation, some states have their own, different rules on worker classification. For example, California applies an ABC test for wage and hour, unemployment insurance, and workers’ compensation purposes. Other states apply the ABC test for some, but not all, employee classification issues, or apply the test only in specific industries. Generally, under the ABC test, a worker would be considered an employee unless all three factors are met.

• An individual is free from control and direction regarding performance of work;
• The work is performed outside the regular course of a business; and
• An individual is engaged in an independently established business, trade, or occupation of the same nature as the work being performed (e.g., a landscaper hired by a company to do landscaping)

Employers might also have compliance obligations related to worker classification under other federal, state, and local or industry-specific regulations and laws. For example, the IRS has a worker classification rule that has three categories to consider when determining whether a worker is an employee for federal tax purposes. The National Labor Relations Board (NLRB) applies a multi-factor common-law test.

Additionally, misclassifying a worker can have serious financial implications for a business, including but not limited to owing back taxes to the IRS, owing state unemployment taxes, and possibly owing back wages for unpaid minimum wage and overtime. Plus, the federal government and the state government can levy fines if misclassification has occurred (e.g., California penalizes businesses up to $15,000 per violation, which can go as high as $25,000 for willful misclassification).

Paychex Can Help

Regulatory activity could add to what already might be a sizable list of compliance obligations your business has to keep up with. Paychex will continue to monitor this topic. Your business should be prepared and Paychex HR solutions can help. We offer compliance support to help keep you up to date on laws and regulations and an HR Professional who can provide proactive HR advice that might help you to develop a strategy, including assessments and updates to policies and procedures so you can ultimately stay focused on your business.

Additional Resources

Different forms used to report payments (e.g., 1099 and W-2)