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2024 DOL ruling explained: Employer’s guide and what it means for worker classification

Updated: February 8, 2024

By: David Kindness, CPA

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For decades, classifying workers has left business owners with more questions than answers. How do you know when an independent contractor’s work crosses over into full-time employee territory? It can be a bit of a tightrope, especially since the number of independent contractors has grown exponentially over the last decade, with as many as 64 million Americans working as independent contractors in 2023. Fortunately, the Department of Labor (DOL) released a newly updated process for making this determination in January 2024.

Fast facts about the DOL’s new independent contractor ruling

  • The ruling provides a six-factor test for whether a worker should be classified as an employee or an independent contractor
  • The January 2024 DOL independent contractor ruling goes into effect on March 11th, 2024
  • This ruling replaces an older ruling from 2021, and employers should use the 2024 ruling moving forward

Because contract work shows no signs of slowing down, proper work classification will become even more important. How will this affect your hiring decisions? Learn more about the DOL’s decision, when it will take effect, and what employers should be aware of.

Understanding the DOL ruling for 2024

On January 10, 2024, the US Department of Labor (DOL) published a final decision (AKA a “final ruling”) that clarifies how to determine whether workers should be classified as employees or independent contractors. This new ruling goes into effect beginning on March 11, 2024, so let’s see what it means for business owners.

 

In a nutshell, this update is designed to

  • Help address the rapidly growing gig economy in the United States
  • Provide clarifications for employers and managers
  • Protect workers’ rights

 

All that said, the main reason for the ruling is to prevent employees from being misidentified as independent contractors, whether intentionally or unintentionally. The reality is that misclassification can mean a worker ends up being denied minimum wage or overtime pay. Others may end up leaving other potential benefits on the table, like paid leave, health insurance, or access to retirement savings plans.

 

Now that we understand the rationale behind the decision, let’s touch on what was originally proposed and what’s now final. ​​

Differences between the proposed rule and 2024 final rule

Simply put, an update to the independent contractor rule has been in the works for a number of years, and the DOL originally announced a proposed rule on October 11, 2022. Since then, it has gone through revisions, and the final ruling, released on January 10, 2024, has a few differences when compared to what was originally proposed.

 

Original proposal

The proposed ruling included a six-factor test, which is similar to the final ruling, but it focused more heavily on the business and less on the worker than the final ruling does.

 

What became final?

The new ruling shifts the focus more towards the worker, and it more closely aligns with the US court system’s pre-existing process for determining worker status, thus reducing the risk of lawsuits and regulatory action.

 

Does this change an older law from 2021?

Yes, and it’s important for employers to understand that this new ruling does replace the 2021 independent contractor ruling, is more comprehensive, and should be used moving forward. Specifically, it now employs a six-factor test in place of the older five-factor test.

 

We will go into more detail on each of the six factors a little further in the article, but let’s get understand why the DOL felt this determination needed to be made.

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What does the new ruling mean?

Determining if workers should be classified as employees or as independent contractors can get tricky. The DOL’s goal with this ruling is to provide employers with reliable guidance, so classifying workers is much less of a heavy lift. While this ruling does affect worker classification, if you were already classifying your workers appropriately, then this change likely won’t affect you.

 

But what if you were operating in a gray area? For those businesses unsure about how to classify workers, or maybe you even had different worker types performing the same tasks, this ruling should be right up your alley. The takeaway is that it will help classify your workers appropriately and correct any misclassifications.

 

In the next section, we’ll discuss the new six-factor test laid out by the DOL that will be used to determine worker classification going forward. But first, we wanted to point something out that you may want to bring up with your bookkeeper or accounting professional if you have any filing that needs to be addressed before the rule goes into effect in March.

 

Filing before the March ruling becomes a requirement

If you are required to file an income or payroll tax return before March 11, 2024, and are unsure of how to classify one or more workers, you should classify them as accurately as you can and file your return (and pay any tax due) by your filing deadline.

 

If the final ruling changes the determination of one or more of your workers, you may need to file an amended tax return to report the change. Consider asking a tax professional if you’re unsure of what to do. They may have you submit Form SS-8, which is used to request an official determination of a worker’s status from the IRS.

 

Next, let’s highlight what employers should know so that determining worker classification feels less like a roll of the dice.

What are the six factors that employers need to consider?

As an employer, it’s important to keep this test in mind and ensure that you apply it evenly and fairly to everyone who works for you. The ruling provides six key factors that will guide the determination of a worker’s status as either an independent contractor or an employee.

 

Employers should use these factors in their own determinations moving forward. The six factors are (in no particular order):

  1. The opportunity for profit or loss that a worker might have.
    • This analyzes whether – and how much – the worker might profit from the work they’re engaged in. It takes into account their negotiating power and the expenses they incur in performing the work (like renting an office space, purchasing supplies, paying for utilities and internet, etc.)
  2. The financial stake and nature of any resources a worker has invested in the work.
    • This factor analyzes the investments, both financial and entrepreneurial, that the worker has made in the work they are performing.
    • It also looks at the business’s investment and compares the two to determine if they are roughly proportional or not.
  3. The degree of permanence of the work relationship.
    • This factor observes whether the working relationship is permanent or temporary in nature.
    • Continual, ongoing work relationships are generally evidence of an employment relationship, whereas temporary or project-based work indicates a contractor relationship.
  4. The degree of control an employer has over the person’s work.
    • Employers have nearly complete control over how and when an employee performs their work, how much they charge, and the final work product the employee produces.
    • Contractors, on the other hand, are free to work when, where, and how they want, charge what they want, and are only constrained by keeping their clients happy.
  5. Whether the work the person does is essential to the employer’s business.
    • This factor analyzes how integral the worker’s responsibilities are to the employer’s business. While both employees and contractors can perform essential work, the DOL believes that the more essential the work is, the more likely the worker should be classified as an employee.
  6. A determination of the worker’s skill and initiative.
    • This factor analyzes how much ownership the worker takes over their work product, as well as how much entrepreneurial initiative they take over their independent business (if applicable).
    • In general, the more entrepreneurial they are, and the less dependent they are on an employer, the more likely they are to be classified as an independent contractor.

 

The DOL mentions that these six factors have been used by courts for decades, and this ruling makes them the norm for businesses too.

 

If any of your workers’ classifications change, be sure to update your payroll processes accordingly. This will ensure that you pay the appropriate minimum wage (if applicable), offer appropriate benefits, withhold payroll taxes for employees, and more.

Understanding this DOL ruling makes good business sense

Misclassifying workers can lead to less-than-ideal outcomes for both employers and employees. On one hand, it can deny those who are going the extra mile the benefits they have earned and are entitled to. It can also pose a risk to employers, potentially attracting unwanted attention from federal agencies when they could be spending more time scaling their operations. The bottom line is that proper classification makes workers feel rewarded for their efforts, leads to increased productivity, and has benefits for both parties in the long run.

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David Kindness is a CPA, experienced financial writer and editor, and a tax and accounting expert with 7+ years of experience. David lives and works in San Diego, California.