So, is the new worker you hired an employee or a Contractor?

To kick off 2024 the U.S. Department of Labor announced its final rule on Employee or Independent Contractor Classification under the Fair Labor Standards Act. It may make your HR and accounting departments act like they are feeling their way through the darkness to remain compliant. The difference between this rule and the regulation in place during the Trump administration is the amount of weight given to different factors.

The Trump regulation gave more weight to factors like the control workers have over their duties and the opportunity for profit or loss.

Now the final rule provides guidance on how six economic reality factors should be considered, with none weighing more than another— opportunity for profit or loss depending on managerial skill, investments by the worker and the potential employer, the degree of permanence of the work relationship, the nature and degree of control, the extent to which the work performed is an integral part of the potential employer’s business, and skill and initiative. So, is the new worker you hired an employee or a contractor?

Here are abbreviated descriptions of each factor:

Opportunity for profit or loss depending on managerial skill.

This factor considers whether the worker has opportunities for profit or loss based on managerial skill that affect the worker’s economic success or failure in performing the work. If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee.

Investments by the worker and the potential employer.

This factor considers whether any investments by a worker are capital or entrepreneurial in nature. Investments that are capital or entrepreneurial in nature and thus indicate independent contractor status generally support an independent business and serve a business-like function.

Degree of permanence of the work relationship.

This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers. This factor weighs in favor of the worker being an independent contractor when the work relationship is definite in duration, non-exclusive, project based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities.

Nature and degree of control.

This factor considers the potential employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship. Facts relevant to the potential employer’s control over the worker include whether the potential employer sets the worker’s schedule, supervises the performance of the work, or explicitly limits the worker’s ability to work for others.

Extent to which the work performed is an integral part of the potential employer’s business.

This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the potential employer’s principal business.

Skill and initiative.

This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business like initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work. It is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.

Confused yet? Many in Congress have already begun to push back against the new rule for making compliance more of a challenge for businesses. The government should not make it more difficult to operate your business. However, for now, this bill will go into effect March 11.

Many ESA members use a hybrid of employees and contractors to get the job done. We will continue to press the federal government to push for a simplification so that our members do not need to take out a scale an attempt to decide whether a worker is an employee or contractor at any given time.