Are Your Workers Employees or Independent Contractors?

We are seeing a historic shift in the way people work in the United States. While independent contractors have existed for a very long time, industries across the country have seen a huge surge in how many independent contractors are brought in by companies to work and produce results.

The “gig economy” is a growing platform where individuals become their own bosses, soliciting opportunities from other individuals and entities to apply their skills in a variety of ways. This ranges from “side hustles” to those who are working as contractors full time. But, this doesn’t mean we’re at the end of the traditional employee – which marks a critical turning point for businesses to understand how to classify employees vs. contractors before running into potential problems with the IRS and federal government.

U.S. Department of Labor Issues Final Rule

This very subject is one that’s evolving as we speak. The U.S. Department of Labor recently issued its final rule to take effect on March 11, 2024, on how to properly analyze workers as either employees (W-2) or independent contractors. This rule falls under the Fair Labor Standards Act and rescinds the previous rule issued in January 2021. The new rule defines six factors that should be considered when analyzing your own workers:

  • Opportunity for profit and loss depending on managerial skill
  • Investments by the worker and the potential employer
  • The Degree of permanence of the work relationship
  • The 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

The Department of Labor employs a “totality-of-the-circumstances” approach in analyzing these six factors. Let’s do a brief review of each.

“Opportunity for profit and loss depending on managerial skill”

While the effects of the worker’s exercise of initiative and management of investment were both considered under this factor, the worker did not need to have an opportunity for profit or loss based on both initiative and management of investment for this factor to weigh towards the worker being an independent contractor. This factor indicated employee status to the extent that the worker was unable to affect their earnings or was only able to do so by working more hours or faster.

“Investments by the worker and the potential employer”

Essentially, if the worker is investing tools and equipment to perform the labor at a level similar to the employer then they are more likely to be considered an independent contractor. If the employer is investing in the tools and equipment and the worker is purely using them to complete the labor then they are more likely to be considered an employee.

“The Degree of permanence of the work relationship”

This one is fairly straightforward. Does the employer intend to keep the worker long-term for numerous roles and projects, or is the worker simply being brought in to complete a small number or even a single task? Workers expected to maintain a long-term relationship with an employer are more likely to be considered employees.

“The nature and degree of control”

Who has control of the work being done? In the case of independent contract work, the employer is generally not able to have significant control over how the work is produced and on what hours the work is done. They are able to set deadlines, but expecting a contractor to work a specific time of day or a certain number of hours a day is more likely to have them considered employees.

“The extent to which the work performed is an integral part of the potential employer’s business”

How vital to the business is the work being done? Is the work being done shaping the business and significantly impacting its direction? If so, it’s harder to define the worker as an independent contractor. Work that is considered to be an integral part of the company itself is generally limited to work done by actual employees.

“Skill and initiative”

This analysis boils down to whether the worker is using more specialized skills that they have honed and perfected on their own or if they are applying skills and initiative that are more controlled in a business-like atmosphere. The former is more likely to come from independent contractors while the latter is more likely to come from employees.

California Nuances

While this article focuses on federal law requirements, companies must also be aware that California enacts much more stringent and detailed classifications due to Assembly Bill 5 and the “ABC Test”. Companies with California employees must be aware of both federal and California state requirements. 

Classify Your Employees With Confidence

With Dahl Law Group, you can navigate these complexities with ease and assurance. Our team of experienced attorneys and legal professionals remains in touch with the changes to these definitions, ensuring that you classify your employees under new and evolving standards with confidence. Contact us for legal guidance tailored to your unique business needs.

The following two tabs change content below.

Dahl Law Group

At Dahl Law Group, we’re not just a law firm. We’re your trusted advisor for your business and family from beginning to end. As your family and business grow, we will be there by your side. Our passion is providing you with peace of mind and protection through personalized estate and business planning.

Latest posts by Dahl Law Group (see all)