The Biden administration in January officially rescinded a rule that made it easier to classify workers as independent contractors under federal wage and hour rules. Outlined below are five things that employers should know about the new rule that takes effect on March 11, 2024:

Refocus on the totality of circumstances

The new rule adopts a comprehensive approach, considering all relevant circumstances to distinguish between employees and independent contractors. It leans toward an employee-centric interpretation, likely classifying more workers as employees. Previously, the economic realities test focused on five factors, emphasizing the worker’s control over work and their profit or loss potential. This older method also prioritized actual work practices over theoretical arrangements. The change adds complexity for businesses using contractors.

New core factors

The new rule scraps the use of these factors and returns to a “totality-of-the-circumstances analysis.” Under the rule, “the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.” The six factors set forth in the new rule are:

the worker’s opportunity for profit or loss depending on managerial skill;
the relative amount of investment made by the worker in comparison to investments made by the potential employer;
the permanency of the worker’s relationship with the potential employer;
the nature and degree of the potential employer’s control;
the extent to which the work performed is an integral part of the potential employer’s business; and
whether the worker uses specialized skills indicative of business-like initiative.

In addition, the new rule states that “additional factors may also be considered if they are relevant to the overall question of economic dependence.”

Increased liability concerns

Under federal wage and hour law, employees are entitled to certain benefits such as a minimum wage and overtime premiums. But most businesses do not provide these benefits to independent contractors. These forms of compensation do not always square with the way contractors carry out work compared to typical employees, and the law does not require businesses to provide them.

Once this new rule takes effect, the risk of misclassification will skyrocket, which means more businesses will face potential liability for not paying these benefits to their workers. The ramifications can be staggering: class-action lawsuits, large settlement demands, backpay, liquidated damages, interest, penalties, and attorneys’ fees can quickly add up.

Next steps

Businesses that rely on independent contractors are at substantial risk of having that classification challenged by the DOL or in private litigation and should proactively take steps to mitigate the risk of misclassification. Compliance is not just a requirement; it’s a strategic advantage. Take decisive steps now to fortify your organization’s standing and ensure smoother operations:

Conduct audits: Businesses that are part of the gig economy or have freelancers or independent contractors should perform internal audits to assess their level of risk for misclassification.
Determine any classification changes needed: Since the new rule will make it harder to classify workers as independent contractors, some existing contractors may no longer meet the criteria and changes will be necessary to ensure compliance.
Update policies and procedures: Review your workforce planning model — as well as your protocols for engagements with gig workers and other independent contractors — to see if updates need to be made in accordance with the DOL’s final rule.
Train managers: Take the opportunity to ensure managers understand best practices for navigating independent contractor relationships.
Work with counsel: Classification issues are complicated, and errors can result in major consequences with huge costs for businesses. So, it’s a good idea to work with experienced counsel before the new rule takes effect to evaluate your programs and minimize your risks.

The new independent contractor rule signifies a pivotal shift, demanding meticulous attention and adaptation from businesses. Acceptance and compliance are the only routes forward.

Stephen Scott is a partner in the Portland office of Fisher Phillips, a national firm dedicated to representing employers’ interests in all aspects of workplace law.