New W2 vs 1099 Rule – Effective March 2024

The U.S. Department of Labor announced on Jan. 9, 2024, the issuance of its final rule regarding how a worker should be classified under the Federal Fair Labor Standards Act. The new rule, which became effective March 11, 2024, rescinds the 2021 independent contractor rule issued under the previous Administration.  It is to be replaced with a six-factor test as outlined below.

 Note: The rule does not adopt an “ABC” test and does not impact independent contractor classification under state laws utilizing the “ABC” test, such as California, Massachusetts, New Jersey, and others. The rule only revises the DOL’s guidance on how to analyze who is an employee or independent contractor under the FLSA. 

The DOL believes this new rule will provide greater clarity for businesses. However, it could potentially lead to an influx of litigation against certain businesses, particularly in the transportation and logistics industries, by attorneys seeking to have independent contractors re-classified as employees.  Such lawyers would then seek to be awarded damages for overtime and deductions from pay, even if the workers in question prefer 1099 independent contractor status.

The following is an overview of relevant factors associated with each of the new six-factor tests:

1. Opportunity for P&L Depending on Managerial Skill:

• Can the worker meaningfully determine or negotiate the charge or pay for the work provided?
• Can the worker accept or decline jobs or choose the order and/or time in which the jobs are performed?
• Can the worker engage in marketing, advertising, or other efforts to expand their business or secure additional work?
• Can the worker make decisions to hire others, purchase materials and equipment, and/or rent space?
• Does the worker have an opportunity for a profit or loss?

2. Investments by the Worker – This factor considers whether any investments by a worker are capital or entrepreneurial in nature. Costs to a worker of tools and equipment to perform a specific job and costs that the potential employer imposes unilaterally on the worker are not evidence of capital or entrepreneurial investment. Investments that are capital or entrepreneurial in nature, and thus indicate independent contractor status, generally support an independent business. For example, increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach.
3. Degree of Permanence – This factor weighs in favor of the worker being an employee when the work relationship is unknown or indefinite in duration, continuous, or exclusive of work for other employers. This factor weighs in favor of the worker being an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities. This may include regularly occurring fixed periods of work; however, seasonal or temporary work by itself would not necessarily mean independent contractor classification.
4. Nature and Degree of Control – This factor considers the degree of the employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship. Economic aspects include, but are not limited to, monetary compensation and structure. Facts relevant to the employer’s control over the worker include whether the employer can set the worker’s schedule, supervise performance of the work, or explicitly limit the worker’s ability to work for others via contract.
5. Integral Aspect of Employer’s Business – This factor considers whether the work performed is a core part of the employer’s business. The factor does not depend on whether any individual worker in particular is integral to the business, but rather whether the function they perform is an integral part of the business. This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the employer’s principal business. This factor weighs in favor of the worker being an independent contractor when the work they perform is not crucial, necessary, or pertinent to the employer’s principal business.
6. Skill and Initiative – This factor considers whether the worker uses specialized skills to perform the work. Also, whether those skills contribute to business-like initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work or where said worker is dependent on training from the employer. Where the worker brings specialized skills to the table, this fact is not itself indicative of independent contractor status. Rather, it is the worker’s use of those specialized skills in connection with business initiatives that indicates that the worker should be classified as a 1099.   

NOTE: The Department of Labor (DOL) and the Internal Revenue Service (IRS) use different criteria for determining whether a worker should be treated as an employee or independent contractor. The DOLs criteria are primarily utilized for determining eligibility for wage and hourly protections under the Fair Labor Standards Act (FLSA), while the IRS’s 20-factor control test is utilized for tax purposes.

If you have any additional questions, please don’t hesitate to contact the office for assistance.

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