Are you in compliance with DOL’s Independent Contractor rules? (Effective March 11, 2024)

By: Swatee Kulkarni

(For expert help on HR matters, please contact Swatee at swatee@gdii.com or 734.717.3495)

As the March 11 effective date of the U.S. Department of Labor’s (DOL’s) independent contractor rule approaches, employers must prepare to comply with the new regulations. While the rule is currently facing legal challenges, it is essential for employers to understand the implications and potential impact on their workforce.

The DOL’s new rule has shifted from weighted factors to a “totality of the circumstances” approach based on six factors:

  • 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 or materials required for the task.
  • The extent to which the service rendered is an integral part of the employer’s business.

While control remains an important factor, employers should be aware of the amount of control they claim over the work the independent contractor is performing, including reserved control, such as the right to discipline a worker for declining assignments.

Internal audits are essential to mitigate misclassification risk. Key audit steps include reviewing independent contractor agreements, determining each contractor’s current compensation structure, identifying each contractor’s day-to-day duties and role in the company’s organizational structure, and assessing the likelihood of misclassification and the company’s potential exposure, taking into account applicable state law and any legal protections in place, such as arbitration agreements.

Once the review is complete, the company will need to determine whether the level of risk justifies reclassifying any contractors as employees and how to mitigate risk when communicating reclassification decisions.

While some workers may not welcome the switch to employee status, employers should emphasize the benefits of becoming employees, such as access to benefits and retirement plans, more training opportunities, and inclusion in team-building events and meetings. Employers may also consider offering bonuses or pay increases to ease the transition.

The potential impact of the independent contractor rule on technology companies that rely on independent contractors for project work is significant. These companies often engage independent contractors for their specialized skills and flexibility, but the new rule’s “totality of the circumstances” approach and emphasis on control could lead to the reclassification of some contractors as employees. This could result in increased costs for benefits and retirement plans, as well as potential downsizing decisions. To mitigate risk, technology companies should conduct internal audits, partner with legal counsel, and communicate effectively with contractors about any changes in their employment status.

Here are some articles to reference as you prepare for these changes:

https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking

https://www.littler.com/publication-press/publication/us-department-labor-finalizes-independent-contractor-regulation

https://www.shrm.org/topics-tools/employment-law-compliance/prepare-independent-contractor-rule

https://www.shrm.org/topics-tools/employment-law-compliance/independent-contractor-rule-impacts

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined

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