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HR View of the New Independent Contractor Rule

What HR Professionals Need to Know About Employee Classification

With the roll out of the U.S. Department of Labor 2024 Independent Contractor Rule in March, questions linger on how to correctly classify current and future contract employees, and those questions may land in Human Resources’ inbox. 

The new rule aims to prevent the misclassification of employees and to apply fair labor practices. An “economic reality” test determines if the worker is in business for themselves or is dependent on the employer. The misclassification of employees as independent contracts may deny workers minimum wage, overtime pay, or other protections under the Fair Labor Standards Act.

Independent Contractor or Employee? Six Key Factors for HR Professionals 

For grey areas, it’s best to involve corporate counsel to interpret the law. However, HR professional should be familiar with the rules, apply them fairly and consistently, and be on alert for situations where hiring managers and supervisors might not be adhering to the guidelines for contract employees. The DOL Fact Sheet 13 expands on the detail and examples of how to make the employee or contractor determination.

Briefly, the six factors of the economic reality test include:   

  • Managerial Skill Influence on Profit or Loss: This factor involves assessing whether workers can influence earnings through managerial decisions. For example, does the worker have control over pricing, negotiation of contracts, or decision-making related to business operations? Independent contractors often have the autonomy to make strategic decisions directly affecting profitability. They bear the risk of financial gain or loss based on their managerial skills and business acumen. 
  • Worker and Employer Investments: Here, the employers might want to check if the worker has invested their own money in buying tools, equipment, or facilities needed for their job. This is usually something that independent contractors do to conduct their work. These investments show that they are independent and committed to their business operations, which sets them apart from employees who rely on resources provided by their employers. 
  • Relationship Permanence: When deciding the nature of the working relationship between an employer and a worker, one key factor to consider is the permanence of the relationship – how long and consistently the employer has employed the worker. If the worker has been with the employer for a significant period and has an ongoing relationship, this may show that they are an integral part of the employer's workforce. Conversely, if the worker is engaged only for the short term, this may suggest that they are an independent contractor hired for specific tasks. 
  • Control Level: Examine the control exerted by the potential employer over the worker's activities. Independent contractors typically have more autonomy. They have the freedom to decide when, where, and how they work without direct supervision from the employer. In contrast, employees are subject to the employer's direction and control in their job duties. 
  • Work Integration with a Potential Employer's Business: When evaluating this factor, it's crucial to consider whether the worker's services play a fundamental role in the core operations of the business. In simpler terms, ask: Is the work directly contributing to the company's central functions? If the answer is yes, and the tasks performed are essential to the smooth functioning of the business, the worker likely falls under an employment relationship rather than an independent contractor. 
  • Skill and Initiative: Assess the worker's ability, drive, and initiative. Independent contractors demonstrate specialized skills, seek relevant projects, negotiate terms, and manage workload independently, setting them apart from traditional employees. 

With a variety of needs, companies may, at times, need flexible or short-term workers. In these situations, staff augmentation or temporary workers, like InterimHR professionals, can offer a compliant solution. Temporary workers are treated as W-2 employees by staffing firms, which means they meet the wage requirements and have workplace benefits, including health care. 

InterimHR professionals can help businesses navigate the complexities of this new rule, apply fair and consistent practices, and provide a compliant HR staff augmentation.  

Ready to lead by example? Reach out to InterimHR today to adopt workplace practices that reflect fairness and compliance.  

IHR cannot and does not provide legal advice. It’s important to consult with qualified counsel before adopting any new policies. It’s also your responsibility to determine whether legal review of work product is necessary prior to implementation.