NEW RULE - EMPLOYEE OR INDEPENDENT CONTRACTOR?
Overview
On January 10, 2024, the U.S. Department of Labor published a final rule that goes into effect on March 11, 2024. The rule revises the Department's guidance on how to analyze who is an employee or an independent contractor under the Fair Labor Standards Act (FLSA).
This final rule rescinds the Independent Contractor Status Under the Fair Labor Standards Act rule (the 2021 IC Rule) published on January 7, 2021, and replaces it with an analysis that is more consistent with the FLSA as interpreted by longstanding judicial precedent.
The misclassification of employees as independent contractors can deny workers minimum wage, overtime pay, and other protections. The final rule aims to reduce that risk while providing a consistent approach for businesses that engage with individuals who are genuinely in business for themselves.
What Determines Whether a Worker Is an Employee or Independent Contractor?
There is no single test. Instead, an "economic reality test" looks to the facts of the situation rather than assuming that a written label, a contract, or a form of business decides whether a worker is economically dependent on an employer.
Courts and the Department have historically weighed multiple factors, with no single factor carrying predetermined weight. The final rule identifies six factors that businesses and workers should consider:
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.
Skill and initiative.
No one factor or subset of factors is decisive. All the circumstances of the relationship should be examined, and the weight given to each factor may depend on the specific facts. Additional factors may also be relevant if they indicate whether the worker is truly in business for themselves versus economically dependent on the employer.
Key Points for Employers and Brokers
This rule will likely lead to more workers being classified as employees.
Depending on the type of business, this could increase overall workers' comp exposure.
State rules still apply and may use different criteria, creating additional layers of complexity.
Businesses will face increased liability risk around independent contractors who are misclassified.
Why This Matters for Workers' Comp Costs
Given the broad reach of this new rule, many businesses may discover later rather than sooner that their independent contractors are actually viewed as employees. When that happens, it can increase workers' comp exposure and drive up premiums — often after an audit, when it's too late to plan.
Proactively reviewing classifications now, rather than reacting after the fact, is the best way to control comp costs and avoid surprises at audit. We wrote about this exposure risk last year, and the new rule only raises the stakes.
Additional Resources
For more information, visit the following Department of Labor resources:
Understanding how classification changes ripple into your experience modifier is critical. Mod Advisor can help you analyze the impact on your comp costs before it shows up on your next renewal.