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March 11, 2024

What Employers Should Know About the Department of Labor’s New Independent Contractor Rule

For any organization that works with individuals who are in business for themselves, a key consideration is whether these individuals may legally be classified as independent contractors rather than employees. In the pet care industry, for instance, pet sitters, dog walkers, and groomers are often considered as freelancers or independent contractors—but depending on a variety of factors, federal law may require them to be classified as employees.

The U.S. Department of Labor (DOL) offers guidance under the Fair Labor Standards Act (FLSA) to help businesses navigate the employee versus independent contractor distinction. In January, the DOL issued a new rule intended to clarify when workers should be classified as employees and reduce incidences of misclassification; the rule will take effect on March 11, 2024. Read on to learn more about this new rule and what it might mean for your business.

Six-Factor Economic Reality Test

The new DOL rule signals a return to the “economic reality” test, which seeks to determine whether a worker is economically dependent on the employer. If so, they will likely need to be classified as an employee. In making this determination, employers should consider the following six factors:

  1. Opportunity for Profit or Loss Depending on Managerial Skill. Does the worker have opportunities for profit or loss based on their own managerial skills, such as business expertise or judgment, that may affect their economic success or failure? For instance, if the worker can set or meaningfully negotiate how much they are paid for the work provided, if they can accept or decline jobs or choose the order in which jobs are performed, or if they can decide to hire others or purchase materials, they will likely be considered an independent contractor. If, on the other hand, the worker has no opportunity for profit or loss based on their own managerial skill, this factor will point towards an employee classification.
  2. Investments by the Worker and Potential Employer. This factor considers whether investments made by a worker are capital or entrepreneurial in nature. Worker investments that support independent business functions—such as those that increase the individual’s ability to do more or different types of work independently in their field, reduce their costs, or extend market reach—indicate independent contractor status.
  3. Degree of Permanence of the Work Relationship. This factor evaluates the duration, continuity, and exclusivity of the work relationship. A more indefinite, non-exclusive, or project-based arrangement indicates independent contractor status, while a continuous and exclusive relationship suggests employee status.
  4. Nature and Degree of Control. Assessing the potential employer’s control over the worker involves considering variables such as setting schedules, supervision, limitations on working for others, and economic control. More control by the employer suggests employee status, while more control by the worker indicates independent contractor status.
  5. Extent to Which the Work Performed is an Integral Part of the Potential Employer’s Business. If the work the individual performs is critical, necessary, or central to the potential employer’s business, it suggests employee status; otherwise, it leans towards independent contractor status.
  6. Skill and Initiative. This factor examines whether the worker uses specialized skills and demonstrates business-like initiative. The use of skills in connection with business initiative indicates independent contractor status, while dependence on training from the employer suggests employee status.

Under this test, no one factor is considered more important than the others; a worker’s classification is based on the totality of the circumstances. This approach differs from the previous rule that was implemented in 2021, which examined two core factors over three “less probative” factors. In explaining why it rescinded the 2021 rule, the DOL has stated that the six-factor economic reality test is more consistent with decades of court decisions, provides greater clarity for businesses, and reduces the risk that employees will be misclassified as independent contractors.

Next Steps for Businesses

For employers, it’s crucial to understand and abide by the DOL’s independent contractor rule—if workers are improperly classified as independent contractors when they actually qualify as employees, the business may be required to pay any wages owed to the employee, in addition to liquidated damages, attorneys’ fees, and other costs. Therefore, as the implementation date for the new rule approaches, all employers in the pet care industry are encouraged to explore the DOL’s resources at https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking and most importantly, consult their attorneys for additional guidance.

At IBPSA, our mission includes staying on top of new laws that may affect pet care services businesses and providing legislative support for the pet care industry. For more resources that may help your business, visit https://www.ibpsa.com/business-help/.