Michele Harmon
This subject may have become the latest hot topic in the oil industry. However, the January 10, 2024, rule from the U.S. Department of Labor (DOL) was no surprise to me. If you followed case law, you had to know it was coming. Effective March 11, 2024—yes, this month—the previous, January 7, 2021, final rule on independent contractors is gone.
The next thing you need to know is that the new rules pay close attention to whether the independent contractor is economically dependent on the employer for work or is genuinely in business for themselves. In other words, if you are the only place where they are a contractor, then they are probably your employees.
Publications are raving about how this will affect the gig workers, but it is far broader. In all my years of being an independent contractor, I was never given a company email, never given a computer, never given business cards, never offered health insurance, and never issued a vehicle to use, and I always worked for several companies at one time.
Moving forward, when you review whether someone who works for you is an independent contractor or an employee, the old “ABC” test is insufficient. The new test is a multifactor economic reality test already used by courts.
This final rule only revises the Fair Labor Standards Act (FLSA) interpretation for the DOL. It does not affect federal, state, or local rules that use a different interpretation. The Internal Revenue Service (IRS) and the National Labor Relations Act (NLRA) have different standards. Then throw in any state or local rules and regulations, and my nonlegal advice is to take the safest course of action.
Let us take a deep dive into the new DOL rules and the six factors you must analyze as to whether the person is an employee or independent contractor under the FLSA:
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and the potential employer
- Degree of permanence of the work relationship
- Nature and degree of control
- The extent to which the work performed is an integral part of the potential employer’s business, and
- Skill and initiative
None of these have more weight than others, but no single factor, or set of factors, automatically determines a worker’s status. Remember the statement, the totality of the circumstances.
Next, can a worker voluntarily waive employee status and choose to be classified as an independent contractor? No, they may not because they would be waiving their legal right to overtime pay and minimum wage, which are all federal laws.
An important note is that the 2021 and 2024 rules are similar in that they both clarify that economic dependence does not focus on the amount of income the worker earns or whether the worker has other sources of income.
The 2024 final rule differs from the 2021 rule in these ways:
- Returns to a totality-of-the-circumstances economic reality test, where no single factor or group of factors is assigned any predetermined weight.
- Considers six factors instead of five, including the investments made by the worker and the potential employer.
- Provides additional analysis of the control factor, including a detailed discussion of how scheduling, supervision, price setting, and the ability to work for others should be considered when analyzing the nature and degree of control over a worker; returns to the DOL’s longstanding consideration of whether the work is integral to the employer’s business (rather than whether it is exclusively part of an “integrated unit of production”);
- Provides additional context to some factors, including a discussion of exclusivity in the context of the permanency factor and initiative in the context of the skill factor; and
- Omits a 2021 Independent Contractor Rule provision that minimizes the relevance of an employer’s reserved but unexercised rights to control a worker.
As stated earlier, employers must follow the IRS rules. The IRS uses 11 factors within three areas:
- Behavioral: Does the company control or have the right to control what the workers do and how they do their jobs?
- Financial: Does the payer control the business aspects of the worker’s job? How is the worker paid, are expenses reimbursed, who provides tools and supplies, etc.?
- Type of Relationship: Are there written contracts or employee-type benefits (e.g., pension plan, insurance, vacation pay, etc.)? Will the relationship continue, and is the work performed a vital aspect of the business?
The NLRB’s 2023 rules changed the idea of entrepreneurial opportunity for gain or loss being the animating principle of the independent contractor test. This overturned a case involving SuperShuttle. Now, entrepreneurial opportunity is considered with the following additional factors:
- The extent of control the employer exercises over the work details
- Whether the work is usually done under the employer’s direction or without supervision
- Whether the worker is engaged in a distinct occupation
- How much skill is required in the occupation?
- Whether the employer supplies the tools and the place of work
- The length of time for which the worker is employed
- The payment method, whether by the hour or the job
- Whether the work is a part of the employer’s regular business
Also, do not forget, workers’ compensation and state rules also vary from state to state.
What kind of trouble can the employer get into if they misclassify a worker as an Independent Contractor and not an employee? The DOL may show up at your door, and you may have to prove your decision on how you classified an employee. The Texas Workforce Commission may come calling when you let an independent contractor go, and the contractor decides to file unemployment. The IRS may come to call if the independent contractor does not pay their taxes, and the employer may be liable for the taxes and penalties. If the employer offers healthcare to the contractor, that cost should be included in the independent contractor’s income statement. Further, if you paid an individual as an independent contractor and they would have made more money as a nonexempt employee, receiving overtime, watch out.
An employer may also be held liable for the actions of an independent contractor, even if they are legitimately an independent contractor.
Examples of when someone might be an independent contractor and not an employee are when the person might work on a short, specialized project or work briefly for an employee on a leave of absence.
SHRM has an independent contractor checklist; the information I have provided comes from the DOL and Federal Register.
Moving forward, examine every current independent contractor again, work with your HR professional, use written contractor agreements, adopt a formal policy for independent contractors, and require contractors to provide information that they are paying their taxes and have liability insurance. Please do not give them an email address, business cards, a computer, or a car, or pay any expenses beyond what is agreed upon in the contract the independent contractor signs before doing any work for your organization.
Lastly, find yourself a great employment lawyer.
“Your employees are the heart of your organization.” Dr. Michele Harmon is a Human Resource professional, supporting clients in Texas and New Mexico that range in size from five to more than 3,000 employees. Email: micheleharmon1@gmail.com