Prepare for the Independent Contractor Rule

As the March 11, 2024 effective date approaches, the business community is abuzz with discussions about the U.S. Department of Labor’s new rule on independent contractors. This change prompts a crucial adjustment period for employers and workers alike. While the transition from contractor to employee status might not be universally welcomed, understanding the implications and benefits of this shift is vital for both parties.

Jeff Siegel, a legal expert with Morgan, Brown & Joy, highlights the contentious nature of the DOL’s new rule, which is currently under legal scrutiny. Despite these challenges, employers must adapt to both the DOL’s guidance and relevant state laws as they reevaluate worker classifications.

“Because the exposure for misclassification can be steep even with small contractor populations, we recommend getting ahead of any classification challenges,” said Amanda Cohen of Baker McKenzie. Cohen suggests that employers conduct thorough audits with legal guidance to ensure compliance. These audits should cover the gamut of independent contractor engagements, assessing their defensibility under various misclassification tests and ensuring proper protocols are in place.

Compliance is a complex issue, given the myriad of tests at both the federal and state levels, and variations across industries. Cohen points out the frustration that comes with such complexity but notes a common thread across most legal tests: the degree of control an employer has over a worker, and whether the worker operates as an independent business.

In states like California and Massachusetts, where tests for independent contractor status are particularly stringent, employers face additional challenges. Terence McCourt and Ian Wright, legal professional from Greenberg Traurig and Alston & Bird respectively, emphasize the necessity of meeting the most protective standards for workers.

While control is an important factor under the DOL’s test, employers should remember that the new rule has changed from weighted factors. David Epstein, SHRM-SCP, director of human resources, introduces a “totality of the circumstances” approach, outlined by the DOL, which pivots on six factors.

Those six factors are:

• The degree to which the employer controls how the work is done
• The worker’s opportunity for profit or loss
• The amount of skill and initiative required for the work
• The degree of permanence of the working relationship
• The worker’s investment in equipment o r materials required for the task
• The extent to which the service rendered is an integral part of the employer’s business

Other relevant factors can also be considered.

However, employers should be aware of the amount of control they claim over the work an independent contractor is performing, including reserved control. For example, reserved control is if an employer reserves the right to discipline a worker for declining assignments, according to the DOL.

Cohen stresses the importance of conducting internal audits under legal advice to mitigate risks associated with misclassification. Joyce Chastain, an employment law consultant, adds that reviewing the nature of the contractor relationship, duties performed, and the contractor’s skills are critical steps in these audits.

Following a comprehensive review, decisions on reclassification should be informed by the assessed level of risk and potential exposure, considering state laws and protections such as arbitration agreements.