What the DOL’s new worker reclassification rule could mean for businesses

A final rule released by the US Department of Labor (DOL) in early 2024 is expected to make it more difficult for companies to classify their workers as independent contractors. The rule, which will take effect on March 11, 2024, rescinds the 2021 rule, which made it easier to achieve independent contractor status.

Under the rule, some employers may need to start classifying certain workers as employees rather than independent contractors. Use of independent contractors is prevalent across various industry sectors, including trade, transportation, information technology, healthcare, and also within the gig economy.

There are a variety of differences in the obligations of an employer regarding protection of workers depending on whether an individual is classified as an employee or an independent contractor.

	Employee	Independent contractor
Minimum wage and overtime pay	Guaranteed under the Fair Labor Standards Act (FLSA) for non-exempt employees	Set their own rates and hours
Unemployment insurance	Employer pays into unemployment insurance fund, providing benefits if an employee is laid off	Not eligible for unemployment benefits
Workers' compensation	Employer provides insurance covering work-related injuries and illnesses. Purchase of workers’ compensation insurance is compulsory for most employees in most states	Must secure their own insurance for work-related injuries, such as occupational accident coverage
Family and Medical Leave Act (FMLA)	Eligible for unpaid leave for qualified reasons	Not covered by FMLA
Health insurance	Employer may offer group health insurance plans	Must secure their own health insurance
Social Security, Medicare, and other taxes	Employer withholds and pays these taxes	Responsible for paying self-employment taxes. May deduct business expenses
Paid time off (PTO)	Employer may offer paid vacation, sick leave, and personal days	Paid time off is not guaranteed
Discrimination protections	Protected from discrimination based on race, gender, religion, age, and other protected classes under various laws	Not covered by all discrimination laws
Right to unionize	Protected right to form or join a union and bargain collectively	Not covered by collective bargaining rights
Job security	May have some protection against wrongful termination, depending on employment contract	Usually "at-will" arrangements
Flexibility	Work under the control and direction of the employer	Choose own projects, clients, and work schedule

How could the DOL ruling impact employers?

Under the new rule, employers are directed to weigh six factors to determine whether a worker is an employee or a contractor:

Opportunity for profit or loss depending on managerial skill
Investments by the worker and the potential employer
Degree of permanence of the work relationship
Nature and degree of control
Extent to which the work performed is an integral part of the potential employer's business
Worker's skill and initiative

The DOL has not determined whether any of the criteria outweighs others.

Additional factors may also be considered if they are relevant to the overall question of economic dependence.

Further, laws may exist at the state level impacting worker classification, such as California’s Assembly Bill 5, one of the strictest tests in the nation. Note that the California legislature created various exemptions for specific professions and industries through Assembly Bill 2257 and other legislation for professions like lawyers, doctors, accountants, and certain types of freelance writers and journalists from AB 5's employee classification requirements.

For businesses that rely on independent contractors, the rule could represent a costly change and expansion of risk profiles, including:

Workers’ compensation programs. If workers who were previously classified as independent contractors become employees, they become eligible for statutory workers’ compensation benefits in the event of work-related injuries. This will increase the total cost of risk (including premiums and retained losses) for many employers. One concern is that premiums will increase to an extent that businesses will no longer be able to absorb their costs and instead have to pass them on to customers, which might, in turn, impact revenues and margins.
Employment practices liability and wage and hour risks. While independent contractors are not eligible for overtime, employees may be, and misclassification of workers could result in significant legal exposure for wage and hour claims. State-specific civil rights laws will also now apply to a much larger population of workers, providing protections for oft-filed claims of harassment, discrimination, and retaliation. Any company that uses independent contractors should prepare to face more frequent wage and hour and employment litigation.

It is unclear how the new rule could impact workers who prefer to operate as independent contractors and whether this would prompt the companies they work for to restrict their working hours or cut them off completely.

3 actions for employers to protect their business

Although it has the backing of labor advocates, the rule has been opposed by business and industry groups, which could potentially lead to legal challenges. And while some organizations that hire gig workers have already said that they do not expect to be materially impacted by this rule, it is prudent for businesses to take the following actions:

Become familiar with state-specific classification laws. Employers should make sure they are fully aware of existing classification laws in each state where they engage with contractors. It is important to be aware of any upcoming changes to state-specific legislation and requirements.
Determine potential financial implications. Business leaders should review their existing use of independent contractors and determine whether they could be classified as employees under the new rule.
Consider impacts on the insurance program. It is important for employers to work with their broker or insurance advisor to determine how the new rule and changes to the employee-base could require changes to the insurance program. If changes are required, it is prudent to start negotiations with insurers as early as possible.

Although the rule is expected to face some opposition, and with some legal challenges already underway, employers should consider taking steps now to prepare and protect their business.

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What the DOL’s new worker reclassification rule could mean for businesses

How could the DOL ruling impact employers?

3 actions for employers to protect their business

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