Employee or Independent Contractor? The DOL Just Changed the Rules... Again

Are you running a business, hiring freelancers, or working as one yourself? You may want to pay attention because on May 1st, the Department of Labor (“DOL”) changed the rule, again, for who counts as an “independent contractor.” 

In a May 1st memo, the DOL stated it is no longer following its own 2024 rulebook when deciding how one is classified as an independent contractor versus an employee. The 2024 test required courts to look at two factors: 

1. How the business controls the employee’s work (how much the business directs the worker); and 
2. If the worker can make (or lose) money based on their own decisions (or, to put it another way: does the worker have opportunity for profit or loss?) 

Instead of following the 2024 rules, DOL investigators will revert to using the 2008 “economic reality” test. Instead of two, this test has seven factors, which include but are not limited to questions like: 

• Is the worker’s role central to the business? 
• Do they work there long-term? 
• Who controls how the work gets done? 
• Did the worker invest in their own tools or equipment? 
• Can they make a profit, or suffer a loss, based on how they work?
• Does the worker need entrepreneurial skill to succeed at the job?
• Is the worker's business their own, or an extension of their employer's?

So, what does this mean for you? 

It means no one factor decides the issue; just calling someone a “contractor” in a written agreement doesn’t and never cut it. But here’s the twist: the 2024 rule is still in effect for private litigation. So, if an employee sues a business, courts might still apply the newer framework. On the other hand, if the DOL comes calling instead of a private employee, courts will use the 2008 test.  

For now, businesses should tread carefully. Abiding by two separate standards can be difficult; one can imagine, for example, that one court could decide that a worker is an employee under the 2008 test, but another court determines the same worker is an independent contractor under the 2024 rule. The rules got fuzzier, and the risks grew larger. Misclassifying employees and contractors can have major consequences: unpaid wages, liquidated damages, lawsuits, and more.

So, what’s your take? Should “employee versus independent contractor” classification hinge on a set checklist? Or is a flexible, case-by-case approach the better path?