HR View of the New Independent Contractor Rule

What HR Professionals Need to Know About Employee Classification

With the rollout of the U.S. Department of Labor’s 2024 Independent Contractor Rule in March, questions remain about 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 ensure the application of fair labor practices. An “economic reality” test helps determine whether a worker is in business for themselves or is economically dependent on the employer. Misclassifying employees as independent contractors may deny them minimum wage, overtime pay, or other protections under the Fair Labor Standards Act.

Independent Contractor or Employee? Six Key Factors for HR Professionals

In cases of uncertainty, it’s best to involve corporate counsel to interpret the law. However, HR professionals should be familiar with the rules, apply them fairly and consistently, and remain alert to situations where hiring managers or supervisors may not be following the guidelines for contract employees. The DOL Fact Sheet 13 provides more detail and examples for making the employee vs. contractor determination.

The six factors of the economic reality test are:

1. Managerial Skill Influence on Profit or Loss
   This factor assesses whether workers can influence their earnings through managerial decisions. For example, does the worker control pricing, negotiate contracts, or make strategic business decisions? Independent contractors typically have this autonomy and bear the risk of financial gain or loss based on their managerial skills and business acumen.

2. Worker and Employer Investments
   Employers should consider whether the worker has invested their own money in tools, equipment, or facilities necessary to perform the job — a common trait of independent contractors. These investments demonstrate independence and commitment to operating a business, unlike employees who rely on employer-provided resources.

3. Relationship Permanence
   The permanence of the working relationship is a key consideration. If a worker has been engaged consistently over a significant period, they may be viewed as part of the employer’s regular workforce. Conversely, if the engagement is short-term or project-specific, it may indicate an independent contractor relationship.

4. Control Level
   Examine how much control the employer exerts over the worker’s activities. Independent contractors typically have the freedom to choose when, where, and how to work without direct supervision. Employees, by contrast, operate under the employer’s direction and control.

5. Work Integration with the Employer’s Business
   Consider whether the worker’s services are central to the company’s core operations. If the tasks performed are integral to the business’s main functions, the worker is more likely to be an employee. Independent contractors typically perform services that are supplementary or tangential to core operations.

6. Skill and Initiative
   Evaluate the worker’s specialized skills, initiative, and independence. Independent contractors usually bring niche expertise, seek out projects, negotiate terms, and manage their workload independently — distinguishing them from traditional employees.

With diverse and evolving workforce needs, companies may sometimes require flexible or short-term staffing solutions. In such cases, staff augmentation or temporary workers, like those provided by InterimHR professionals, can offer a compliant and reliable option. Temporary workers are classified as W-2 employees by staffing firms, ensuring they receive proper wages and access to benefits, including healthcare.

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

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.