Your neighbor kid mows your lawn. A guy from church fixes your broken slider door. Can you pay them cash? Probably. How about your full-time nanny? Probably not. Drawing the line between independent contractors (who receive IRS Form 1099 and pay their own taxes) and employees (who receive IRS Form W-2 and for whom withholdings must be made) has never been easy. A new rule issued by the Department of Labor (DOL), which takes effect on March 11, 2024, pushes the line toward employee designation.

DOL oversees enforcement of the Fair Labor Standards Act (FLSA), an expansive piece of legislation that was part of Franklin Delano Roosevelt's New Deal agenda. FLSA established a federal minimum wage as well as overtime requirements for hourly workers. It includes various record-keeping and work-place rules too. FLSA only applies to employees, not to independent contractors. So DOL has long been interested in discouraging (with fines and penalties if necessary) employee misclassification. The Trump administration simplified DOL’s longstanding test for misclassification in 2021. The Biden administration argued the 2021 test deviated from established law and precedent, and on January 10, 2024, the DOL published its new rule.

The rule requires potential employers to balance six different factors derived from federal case law and reflecting “economic realities” before making a final determination of independent contractor or employee. Specifically:

• Opportunity for Profit or Loss depending on Managerial Skill. The greater the chance that a worker can impact the work to generate a personal profit (or risks a personal loss), the more this factor favors an independent contractor designation.
• Investments by the Worker and the Potential Employer. If the worker invests personally in tools, marketing, subcontracting, etc., she looks more like an independent contractor. If the expense of the work falls primarily with the hiring party, the factor favors an employee designation.
• Degree of Permanence of the Work Relationship. A long-term arrangement between the same worker and hiring party supports an employee designation. Multiple, flexible engagements among a range of hiring parties lean toward independent contractor status.
• Nature and Degree of Control. The more control the potential employer has over how the worker does the job, the more likely the worker is an employee.
• Is the Work Integral to the Business? Workers engaged at the core of a business’ operation (e.g., assembly line workers for an automobile manufacturer) will more likely be deemed employees than workers performing ancillary services (e.g., a marketing consultant for that same manufacturer).
• Skills and Initiative. Workers who market and leverage their specialized skills to initiate business opportunities resemble independent contractors. Workers with the same specialized skills who apply them repetitively for the same enterprise are likely employees.

It is important to remember that classification cannot be determined simply as a matter of contract between the parties. Likewise, potential employers should be aware of a large body of existing case law where classifications have already been made. Application of the six-factor test may lead the employer to one conclusion; but that conclusion will be trumped by existing case law that reaches the opposite conclusion on a similar fact pattern. The best bet is a periodic audit with an HR or legal professional to review and determine the classifications in place.