The recent rule from the U.S. Department of Labor (DOL) lays out how employers should decide if their workers should be paid as W-2 employees or as 1099 contractors. This rule becomes effective on March 11, 2024 and is meant to protect workers from wage theft by their employers.
The main aim of this new rule is to address the problem of employers wrongly labeling employees as independent contractors, which denies employees minimum wage and overtime rights. This misclassification can make employers liable to pay back wages under a federal statute (FLSA) and even face penalties for not paying payroll taxes as per the law. It can also result in employees not being paid minimum wage for all hours worked or overtime pay for hours exceeding 40 hours per work week.
The rule overturns a 2021 independent contractor test created during the Trump’s administration, as the current DOL sees the old test as too favorable to employers and a departure from the DOL‘s historic approach.
What does the new rule say?
The new rule introduces a six-factor test that reflects the traditional way courts determine if a worker is an independent contractor or an employee. An independent contractor works for themselves and gets paid a negotiated rate or amount, while an employee must get at least minimum wage and overtime for hours over 40 in a week, plus certain benefits.
These factors analyze the relationship between the worker and employer, with no single factor carrying more weight than the others. They include:
- How much control the employer has over the work.
- Whether the worker can gain or lose financially.
- The skills and initiative needed for the work.
- How permanent the working relationship is.
- The worker’s investment in equipment or materials.
- How much the service provided is integral to the employer’s business.
How would the new rule apply?
For example, a programmer hired by a company to specifically build an application is likely an independent contractor because:
- The programmer decides how and when to do the programming;
- They set the price for their work, showing they’re in business for themselves;
- They have the skills needed and are not relying on the company for training;
- The working relationship is temporary, only for the specific project;
- The programmer owns and uses their own equipment, such as computer, etc.;
- The building of the app is not related to the company’s main business.
On the other hand, an IT worker at the same company under the company’s supervision would typically be considered an employee entitled to minimum wage and overtime protections.
What are examples of 1099 contractors v. W-2 employees?
Examples of 1099 Workers
- Workers who work on an assignment basis, rather than set hours, with defined deliverables, but who are left to decide how and when they will perform the work;
- Consultants who support a company for a project with a clear start and end date;
- Gig workers who perform services and get paid through an application;
- Other individuals who work on assignment or project basis;
Examples of W-2 Employees
- Workers with scheduled hours (remote or in-office) and ongoing work with no defined end date;
- Workers who have assigned hours and use company equipment, vehicles, and uniforms;
- Workers whose work is controlled by company employees;
What is the practical effect of the rule?
The passage of this rule should prompt employers to review how they classify their workers to ensure they’re doing it correctly. Employees who suspect that they have been improperly classified as independent contractors, as opposed to W-2 employees, should contact a labor and employment attorney to consider their options.
Leiza Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.