Construction Law

New Independent Contractor Rule Affects Subcontractors

If you use subcontractors or 1099 salespeople, a new rule announced by the U.S. Department of Labor on January 9 could impact the way you do business. This final rule is in keeping with the agency’s proposed rule from October 2022, and it aligns with the “totality of circumstances” parameters for classifying workers. It goes into effect on March 11, 2024.

This final rule overrides the 2021 Independent Contractor Rule, which was enacted in the closing weeks of the Trump administration. In May 2021, the Biden administration took steps to withdraw that rule, but a federal court kept it in place.

What the Rule States

According to this framework, there are six factors to consider when determining if a worker should be categorized as an independent contractor or an employee. These factors are as follows:

  • If the worker has an opportunity for either profit or loss. Can the worker negotiate the rate of pay and choose what task to perform? Does the worker use marketing efforts to acquire more work? If the answer to those questions is yes, that worker is likely an independent contractor.
  • What investments are made by the employer and the worker. Does the worker purchase and use personal equipment? Or does the employer provide all the necessary equipment? If the latter, the worker is likely an employee.
  • What degree of permanence the working relationship has. Is the work available on a regular, ongoing basis, or is it sporadic? If the latter, the worker might be an independent contractor. This consideration can vary based on the industry.
  • The nature of the work and the degree of control the worker has over it. Does the employer set the schedule and supervise the worker’s performance? If so, the worker may be an employee.
  • If the work is integral to the employer’s business. Is the work performed necessary and critical to the success of the company? If so, the worker is likely an employee.
  • How the worker’s skill and initiative are utilized. If the worker does not use specialized skills or if the worker received training from the employer, that could indicate employee status. However, it is important to consider how skills are used in connection with the business.

No single factor sets the classification; instead, all six factors must be considered. For more specific details about each factor, visit the FAQs on the DOL site.

The Industries Impacted

Independent contractors are active in a wide range of industries. They are most prevalent in areas such as construction, trucking, delivery, agriculture,  landscaping, and healthcare, but they also can be found in retail, janitorial services, housekeeping, and security. Independent contractors have more flexibility and may work for multiple employers. Unlike employees, they do not receive overtime pay and benefits, such as medical insurance, sick leave, and paid vacation.

According to data from Reuters, employees are much more expensive than contractors, raising costs for employers by as much as 30 percent. With this new rule, companies may need to reclassify some of their workers and take a financial hit.

Final Thoughts

Determining if a worker is a contractor or employee can be challenging, and making the wrong classification can be costly. One of the most confounding factors regards whether the work is integral to the business. In many ways, subcontractors obviously perform critical work, whether they are roofers or gutter installers, but classifying all of them as employees seems unreasonable.

If you have questions about how to classify your workers, you can contact your local DOL Wage and Hour District Office



Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.