What the DOL Ruling on Independent Contractor Classification Means For You

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Unless your job title includes General Counsel or Attorney, workforce compliance can cause a “deer in headlights” effect. This week’s much-anticipated news from the DOL further adds to the compliance quandaries. As we nodded to in our 2024 workforce predictions, January marks a final ruling by the US Department of Labor regarding independent contractor classification. 

Spoiler alert: Don’t worry. We’ve got your back. Despite widespread concerns that the updated law would make it harder for hiring companies to navigate compliance matters — this DOL ruling doesn’t change much. 

What it does is nullify a previous rule, and emphasize that employees receive the entitlements and benefits they deserve. Plus, it clears up concerns about the law becoming even more strict when classifying someone as an independent contractor. 

The final rule

On January 9, 2024, the US Department of Labor released the final rule on independent contractor classification (in the works since October 2022). The new regulation rescinds the 2021 ruling from the previous administration, and it uses a multifactor “economic reality” test to confirm when a worker is, or is not, an independent contractor. The law is set to go into effect on March 11, 2024, but is likely to face legal challenges in the courts.

According to the DOL, “Independent contractors in business for themselves play an important role in our economy – and this rule won’t change that. What it *will* do is ensure employees receive wage and hour protections.”

“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” explained Acting Secretary of Labor Julie Su. “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.” 

“The guidance provided by the final rule aligns with longstanding judicial precedent on which employers have previously relied to determine a worker’s status as either an employee or independent contractor.” 

What this law means for your business 

Legal experts including Worksuite’s own Engage Team concur that this new rule is unlikely to have a significant impact on the best practices already in place, for businesses that have a compliance process. Meanwhile, for any companies who may have compliance concerns, or perhaps no internal compliance function at all, below are some ways to shore things up. 

How to keep compliant

As advised by law firm Locke Lord LLP as well as Worksuite’s own Compliance Team, businesses that engage independent contractors should consider a multi-pronged approach to reduce legal risk of their IC relationships. 

1. Stay abreast of local labor laws 

Improve your company’s compliance with relevant federal and state labor laws to avoid misclassification risks — especially in the event of an audit. After all, each country and state has its nuances for how, and who, you can hire. 

Not to mention, the U.S. penalties for misclassification can amount to $1,000 per misclassified employee, to a year of jail time, to paying back wages. It pays to stay compliant. 

2. Update your IC agreements 

Make sure your independent contractor agreements contain the appropriate waivers and clauses to protect your company from risk and minimize the likelihood of class action lawsuits. 

By using a comprehensive compliance onboarding workflow, companies can ensure that all necessary documents are up-to-date, signed and securely stored in one centralized system. 

3. Seek compliance counsel 

Don’t go it alone. Whether you rely on in-house general counsel, an AOR or EOR, or a workforce management partner like Worksuite, it’s important to structure and document your contractor relationships consistently. 

As Locke Lord continues, “Businesses should avoid quick fixes or one-size-all approaches, which tend to be ill-fitting and often backfire by creating evidence that the practice of the company deviates from the language in its IC agreement.” 

4. Consider an AOR or EOR

An AOR (Agent of Record) or EOR (Employer of Record) can be a great solution for companies that engage a large international workforce. 

  • AOR: An entity that acts on behalf of your company to engage and pay independent contractors. 
  • EOR: An entity that acts on behalf of your company to hire and payroll full-time employees. 

Both AORs and EORs indemnify the company of compliance risk by acting as a “middle man” in between them and their talent. 

Interested in worker classification and AOR/EOR services?
Consult with the Worksuite Engage team today.

Easier than ABC 

Before this final rule was released, many people wondered if the strict ABC test would be the path forward, used in California, New Jersey, Georgia, West Virginia, and 25+ other states. 

For reference, the ABC Test considers the following 3 criteria to determine if a worker is in fact an independent contractor, not an employee:

  • Absence of Control: The worker is free from the control and direction of the hiring entity. Essentially, they do the work how and when they want to. 
  • Freedom & Flexibility of Their Own Business: The worker performs work outside the usual course of the hiring entity’s business. 
  • Customarily Engaged: The worker regularly works as an independent contractor in this trade. 

Coincidentally, the administration rejected the stricter approach of the ABC Test, in favor of the long-standing multifactor “economic reality” test

Per the DOL FAQs, “This [economic realities] test relies on the totality of the circumstances where no one factor is determinative.”

Take a breath

This news should come as a relief to any hiring companies who were concerned about the 2024 ruling, and the potential of this administration to stifle the use of independent contractors. According to Eric Rumbaugh, law partner at Michael Best & Friedrich LLP, the new rule is unlikely to have a large impact on litigation.

“I don’t see a meta change in who wins and who loses in court because of this new enforcement policy,” Rumbaugh shares with Staffing Industry Analysts (SIA). “I believe this has been the DOL’s enforcement position all along.”

Stay compliant at scale 

Need help compliantly managing your contingent workforce? Consult with a workforce compliance specialist from Worksuite today.

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