Federal Department of Labor Issues Independent Contractor Rules

By Michael Lodge on January 31, 2024


Michael Lodge - The Business Advisor - 424.542.7299 - www.lodge-co.com: The classification of workers as independent contractors or employees is a critical issue with significant implications for both employers and workers. The distinction impacts various aspects such as tax obligations, benefits, and legal protections. To provide clarity, the Federal Department of Labor has defined specific criteria to distinguish independent contractors from mployees.

In the United States, the Department of Labor has establishedguidelineses to determine whether a worker should be classified as an independent contractor or an employee. These guidelines consider several factors, including the nature of the work, the degree of control exerted by the hiring entity, the worker's role in the hiring entity's business, and the worker's skill and initiative. By examining these factors, the Department of Labor aims to ensure that workers are classified appropriately, safeguarding their rights and entitlements.

Degree of Control: One of the primary considerations in determining a worker's classification is the degree of control exercised by the hiring entity. The more control the entity has, or reserves the right to have, over how the worker performs the job, the more likely the worker will be classified as an employee. It is important to note that actions the hiring entity is legally required to take are excluded from this consideration. However, if the hiring entity enforces rules that go beyond legal requirements, such as specific safety rules tailored by the employer, this may indicate employer-type control, potentially leading to an employee classification.

Extent of Work's Integration: Another crucial factor is the extent to which the work performed is "integral" to the hiring entity's business. If the work is deemed critical, necessary, or central to the potential employer’s principal business, it suggests an employment relationship. This factor reflects the significance of the worker's role in the core operations of the hiring entity.

Worker Skill and Initiative: The worker's skill and initiative also play a key role in determining whether they should be classified as an independent contractor. An independent contractor typically utilizes specialized skills and demonstrates business-like initiative in performing the work. This factor emphasizes the independent nature of the contractor's role and their ability to operate autonomously.

California has the ABC test for independent cintractors. The Department of Labor has made a significant decision by explicitly rejecting the ABC test as the new rule, citing its inflexibility and inconsistency with U.S. Supreme Court interpretations of the FLSA. The ABC test, as outlined in the California Labor Code, sets strict criteria for determining whether a worker is an employee or an independent contractor, placing the burden of proof on the hiring entity to demonstrate limited control, work outside the usual course of business, and independent trade engagement. Despite the Department of Labor's new rule, it emphasized that businesses must adhere to all relevant federal, state, and local laws to provide the highest level of protection for workers. As a result, the ABC test's more stringent standards for minimum wage and overtime rights will continue to apply to the majority of work conducted in California, superseding the more flexible DOL rule

Consult your Labor attorney for clarification as it pertains to your business.

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