Understanding the New Independent Contractor Rule

The 2024 Rule Change

The Department of Labor (DOL) published a new rule effective March 11, 2024, revising the test for determining whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The new rule replaces the 2021 rule that had focused primarily on two "core factors" with a return to a totality-of-the-circumstances analysis examining six factors. No single factor is determinative.

This matters because workers classified as employees are entitled to minimum wage, overtime pay, and other FLSA protections. Workers classified as independent contractors are not. Misclassification exposes employers to back wages, liquidated damages, penalties, and potential liability under state law and tax codes.

The Six-Factor Test

The 2024 rule examines the "economic reality" of the working relationship through six factors:

1. Opportunity for Profit or Loss

Does the worker have the ability to earn more or lose money based on their own managerial skill or initiative? Factors include whether the worker negotiates pay, accepts or declines jobs, markets their services, and makes decisions that affect their earnings. A worker who can only earn more by working more hours looks more like an employee. One who can increase profits through business acumen looks more like a contractor.

2. Investments by the Worker and the Employer

Does the worker make investments in equipment, tools, or infrastructure that are capital or entrepreneurial in nature? Purchasing your own laptop to work from home is different from investing in a specialized vehicle, maintaining an independent office, or hiring your own staff. Investments that look like costs of doing business suggest contractor status; investments that primarily serve the employer suggest employment.

3. Degree of Permanence

An indefinite, continuous, or exclusive relationship suggests employment. A relationship that is project-based, has a definite end, or is non-exclusive suggests independent contractor status. Workers who move between different clients and engagements look more like contractors.

4. Nature and Degree of Control

This remains a central factor. Does the employer control when, where, and how the work is performed? Control includes setting schedules, supervising the manner of work, restricting the worker's ability to work for others, and using technology to monitor performance. The more control the employer exercises, the more the relationship looks like employment.

5. Extent to Which the Work Is Integral to the Employer's Business

Work that is critical to the employer's principal business suggests employment. Work that is peripheral or supplementary suggests contractor status. An accounting firm's accountants are integral; a plumber who occasionally fixes the office pipes is not.

6. Skill and Initiative

Does the worker use specialized skills in a way that demonstrates business-like initiative? A skilled worker who markets their services, maintains a client base, and operates independently looks more like a contractor. A skilled worker who uses their abilities only as directed by the employer looks more like an employee, regardless of skill level.

Practical Impact

Audit your current classifications. Review every independent contractor relationship against the six-factor test. Pay particular attention to workers who perform core business functions, work exclusively or primarily for your company, or have been engaged for long periods.

Do not rely on contracts alone. Calling someone an independent contractor in a written agreement does not make them one. The analysis is based on the actual working relationship, not what the paperwork says.

Consider state law differences. The DOL rule applies only to FLSA classification. Many states use different tests, and some, like California with its ABC test, are stricter than the federal standard. You must comply with the most restrictive applicable test.

Review your hiring practices. When engaging a new contractor, document the factors supporting independent contractor status at the outset. Structure the relationship to preserve genuine independence: allow the worker to set their schedule, serve other clients, use their own tools, and control how the work is performed.

Assess business model implications. Some business models that rely heavily on independent contractors may need to be restructured. If most of your workforce consists of workers who function as employees in all but name, the risk of a misclassification finding is high.

What Has Not Changed

The IRS uses its own multi-factor test for tax classification. State unemployment and workers' compensation agencies use yet other tests. The DOL rule addresses FLSA classification specifically. A worker can be an independent contractor under one test and an employee under another. Compliance requires analyzing each applicable test separately.

The safest path is to classify workers based on the most restrictive test that applies and to structure relationships around genuine independence.