The latest final rule issued by the DOL for independent contractor analysis changes in March 2024. The new rule will emphasize the economic realities test, similar to that in previous years. The analysis of independent contractor status will again be based on six factors (“totality of the circumstances economic reality test”). It has a significant emphasis on the potential, not just the actual control of the work. In our opinion, and those of many legal experts and other HR professionals, the new federal test will increase the likelihood of workers being classified as employees rather than independent contractors. Some states have additional testing requirements that are more stringent than the FLSA federal test that was recently issued as a final ruling on the matter.
Key elements for assessment will include the level of employer control, the freedom of the individual to work for other employers, the ability (or proof) of the individual to sell services on the market, and flexibility in scheduling and pricing. You, as an employer, can expect increased scrutiny to evaluate individuals as employees rather than independent contractors. In some states, the burden of proof will fall on the employer to prove otherwise.
The new independent contractor analysis test avoids prioritizing any single factor and introduces additional unenumerated factors for consideration. A further complication is that an individual can be classified as an employee under FLSA yet pass the test as an independent contractor for tax purposes under the IRS test.
What happens if I misclassify an employee?
So, you may be asking “What happens if I misclassify an independent contractor”? As an employer, you may be responsible for paying any unpaid wages owed to the employee. You could also be liable for potential liquidated damages equal to back wages and potential civil money penalties. Employers may also be responsible for attorney’s fees associated with litigation.
What should I do to prepare?
If you are an employer, you are advised to carefully assess and potentially revise your independent contractor agreements. You also should analyze any current independent contractors you utilize as a result of the new rule. The new rule goes into effect on March 11, 2024. Seeking guidance from HR, legal, and tax consultants is going to be critical to successfully navigate appropriate classifications.
