Biden's new worker classification rule is tightening the definition of independent contractors

Most businesses have a mix of employees — those with full benefits and protections — and independent contractors that make up their workforce. But a new law may mean employers now have more employees than they thought. 

The U.S. Department of Labor has finalized the Biden administration's worker classification rule, which will go into effect March 11. The rule tightens the definitions around what makes someone an employee versus an independent contractor, revising the 2021 rule, which made it easier for employers to label a worker as a contractor. Given that state data shows 10-20% of employers misclassify at least one employee at their company, this month may mark the perfect time to review these labels. 

"Generally, the more control you exercise over an individual, the less likely that person is an independent contractor," says Linda Bond Edwards, partner at commercial litigation firm RumbergerKirk. "The more structured the employer makes the job, the more that person looks like an employee in a contract." 

Read more: From AI to I-9: 3 hiring and compliance changes to manage in 2024

The new rule includes a six-factor test, essentially asking employers what degree of agency the worker has, and whether they gain an entrepreneurial benefit from partnering with that employer. An independent contractor should be able to set their own rate and schedule within reason, and contribute to the business for a set amount of time. Additionally, independent contractors should be free to work with other businesses. 

For example, if a worker is an independent contractor at a restaurant, they may come in as a cook on certain days at dinner time. They may bring their own equipment, and may work at other restaurants or own related businesses like a food truck. Beyond the set hours that the worker is at the restaurant, the employer has no control over them. If the independent contractor doesn't at least have that much agency, then it may be time to reclassify, underlines Edwards.

Read more: 5 global business risks employers should watch for in 2024

"If the [independent contractor] chooses to work for you on Tuesdays and Thursdays, the employer has no right to tell them they can't work for the restaurant down the street on Mondays and Wednesdays," she says. 

Edwards advises employers to review the primary duties of their workers and the parameters that each individual must work within. 

"Are they coming in, providing the service and then walking away, or do you treat them just like any other employee?" says Edwards. "If you're using a lot of independent contractors that you think may be performing duties that your regular employees are performing, then they're likely employees." 

Read more: Are your employees working two jobs? Why you may need a policy for side gigs

Edwards encourages employers to consult compensation specialists and employment lawyers to ensure they will be compliant with the new rule. With just a month before it goes into effect, the deadline to get these definitions straight is coming down to the wire. If employers misclassify, they can be held liable for failure to meet requirements set by the Fair Labor Standards Act, like overtime pay, as well as incur penalties for not withholding money from workers' paychecks for state and federal payroll taxes.

"Employers should be careful when they make determinations about who's an independent contractor," says Edwards. "If they get it wrong, it can be costly, so employers should take the steps to ensure they're paying employees accordingly."