The Department of Labor’s new independent contractor rule (ICR) has reclassified employees. Here’s how things have changed, what it means for your business, and what you can do to maintain compliance.
Back in 2021, the US Department of Labor (DoL) introduced a new rule that substantially changed the way workers are defined as employees. It simplified employee definition, outlining several “core” and “non-core” factors that must be in place for someone to be considered an employee of an organisation, rather than an independent contractor.
This simplicity was welcomed by businesses. However, it had negative implications for many workers. Under the rule, thousands of gig economy and non-permanent workers were not classified as employees – and were not entitled to minimum wages, overtime payments, or employee benefits.
In early 2024, a new independent contractor rule (ICR) was introduced, rescinding much of the previous rule. This new, more worker-friendly rule has been welcomed by worker advocacy groups and millions of workers themselves. However, it carries significant implications for businesses, and brings with it a wealth of new compliance challenges.
How the new ICR will impact businesses
By changing how independent contractors and employees are classified, the new ICR increases the chances of businesses misclassifying their workers.
The new rule reinstates a six-factor test to determine whether a person is truly operating as an independent contractor or is dependent on a single employer. The six factors employers now need to assess are:
- Opportunity for profit or loss based on managerial skill
- Investments by the worker and the potential employer
- Degree of permanence of the relationship
- Nature and degree of control
- Extent to which the work performed is an integral part of the potential employer’s business
- Skill and initiative
No single factor is more important than others. Rather, decisions on classification are made based on the balance of all of them – which can introduce ambiguity and cause compliance errors. And when that happens, it can lead to significant costs for the business.
As part of the US Fair Labor Standards Act (FLSA), workers who are misclassified could be entitled to unpaid wages, taxes, overtime payments, liquidated damages, and any associated attorney’s fees. Across large groups of employees, these costs can rapidly spiral into the millions.
High-profile misclassification cases involving household name brands have already led to hundreds of millions of dollars in ordered payments to employees. And these cases are only becoming more common.
Three strategies to streamline ICR compliance
So, now that classification is getting more complicated for businesses, what can they do to adapt and mitigate these new risks? Here are three actions that we recommend for all organisations that want to maintain compliance with the new ICR and ensure all of their employees are classified correctly:
1. Develop a classification checklist tool
Employee classification isn’t a one-time exercise. It’s something your teams will continuously need to do as new people are brought on board, new partnerships are formed, and new contracts are drawn up. So, above all else, it’s crucial to enable consistent, repeatable classification decision-making.
By developing your own classification checklist tool, you can rapidly evaluate workers against the six-factor list set out by the DoL and bring some much-needed objectivity to what has become a less clearly defined process.
These tools can also incorporate all relevant state-level legislation, to help you manage local nuances in classification rules at scale. Using this tool you can effectively develop benchmarks that enable your teams everywhere to rapidly and confidently classify employees.
2. Re-evaluate your contracts and engagements
Under the new rule, some of your existing relationships with contractors could potentially be reclassified as contracts of employment. So, it’s important to carefully assess all of your existing contracts and agreements to ensure everyone you work with is classified correctly.
It’s hidden risks like this that pose the greatest threat to businesses. You may have established a relationship with an independent contractor years ago and treated them as such ever since. But now, that contractor may be entitled to full employee rights and privileges and can take legal action against you to get them.
3. Train your HR teams in how to maintain compliance
Looking ahead, organisations must make compliance with the new ICR an always-on process. As we just identified, bespoke tools can help with that. But it’s also important that every HR decision-maker fully understands the new classification rules, and what they can do to help the organisation avoid risk.
Investments in training and upskilling to ensure teams can make the most of any new tools and checklists you empower them with, are more than worthwhile. The small cost associated with doing that is minute compared to the potential costs of non-compliance.
Streamline compliance with support from The Smart Cube
At The Smart Cube, we’ve helped organisations around the world respond to emerging legislative shifts like this. From analysing the knock-on impacts on markets and contracts to advising on the most appropriate solutions to help companies detect issues and continuously maintain compliance, we can provide the support you need to drive accurate classification of all your employees.
To find out more, visit or talk to us today.