Key insights
- Effective March 11, 2024, the Department of Labor has updated the rule on the analysis classifying employees or independent contractors.
- The rule is consistent with the Fair Labor Standards Act and the decades of case law interpreting it, and more substantial than the Department of Labor’s earlier guidance on the same topic.
- Organizations should consider all factors related to the updated independent contractor rule.
Work with an experienced HR team to understand updated rules.
If you use or are considering using 1099 independent contractors (IC), the Department of Labor’s (DOL) final rule regarding the classification of employees may have a substantial impact on your current operations.
At a glance
Effective date: March 11, 2024
Rule: Classification of independent contractor vs. employee.
Function: How to analyze whether a worker is classified as an independent contractor or employee.
Change: Rescission of the 2021 IC Rule, replaced with new regulation. Analyze using totality-of-the-circumstances under the six-factor economic reality test.
Impact: Evaluation of current and future independent contractors for compliance with the 2024 IC rule may be necessary for your organization.
Review a breakdown below of the 2024 IC classification analysis and learn what this may mean for your organization.
New independent contractor rule
On January 10, 2024, the DOL published a final rule on the analysis classifying employees or independent contractors. This is an update to the previous rule from 2021 and goes into effect March 11, 2024.
As stated by the DOL, the rule “modif[ies] Wage and Hour Division regulations to replace its analysis for determining employee or independent contractor classification under the Fair Labor Standards Act (FLSA or Act) with an analysis that is more consistent with judicial precedent and the Act's text and purpose.”
What has changed?
| Previous IC Rule (2021) | New IC Rule (2024) | |
|---|---|---|
| Test used | Five-factor economic reality test | Six-factor economic reality test |
| Analysis of classification | Core factors Relative weight of factors is measured Nature and degree of control over the work and the worker’s opportunity for profit or loss. If the two core factors pointed toward the same classification, there was a “substantial likelihood” it was the worker’s accurate classification. |
Totality-of-the-circumstances Factors do not have a predetermined weight and no one factor is dispositive. Considering the factors as a whole, the worker is not likely to be an independent contractor if the worker is economically dependent on an employer for work. |
| Business impact | Business friendly Ability to classify as independent contractors based on less factors that implied classification. |
Employee friendly When test is applied, consideration of all factors helps to protect employees from misclassification. |
What does this mean?
- The rule provides detailed guidance on employee or independent contractor status and how to determine the appropriate classification. The rule is not only consistent with the FLSA and the decades of case law interpreting it, but also more substantial than the DOL’s earlier guidance on the same topic. This rule emphasizes the totality-of-the-circumstances in consideration of the six-factor test.
- Misclassifying workers should be harder to do under this test.
- The final rule’s analysis applies to workers in any industry and is accessible in the Code of Federal Regulations.
Actions you can take now
- Before hiring an individual to do work, evaluate in light of the new rule using totality-of-the-circumstances analysis of the economic reality test to identify the appropriate classification.
- Evaluate current independent contractors against the new rule to determine classification.
- After evaluation(s), reclassify workers who are misclassified or alter position to meet the desired classification under the new rule.
- Review existing contracts with independent contractors to evaluate that they accurately reflect the nature of the relationship. These contracts should not have any provisions that could be misinterpreted or used to argue the independent contractor is an employee.
- Implement or update policies and procedures that discuss or impact employee and independent contractor classification.
How we can help
Staying ahead of employment classification is critical to successful FLSA compliance and protection against costly errors. CLA’s HR consulting professionals can advise you on a wide range of workforce issues and help keep your organization HR compliant.
CLA cannot and does not provide legal advice. It’s important to consult with qualified counsel before adopting any new policies. It’s also your responsibility to determine whether legal review of work product is necessary prior to implementation.
Contact us
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