Whether you make a deal with a landscaper or work with an independent graphic designer, hiring freelancers is extremely common. However, in 2024, the Department of Labor (DOL) implemented a final rule that may change how your business interacts with these contractors.
In this post, we’ll explain the DOL’s new final rule and discuss its potential impact on your operations.
What is the 2024 Independent Contractor Final Rule?
The 2024 Independent Contractor Final Rule is a set of guidelines introduced by the DOL to classify workers as employees or independent contractors. The department published the final rule on January 10, 2024, and it went into effect two months later on March 11.
This final rule replaces the previous DOL guidelines published in 2021. Here are the key elements now used to determine worker classification:
- Is there an opportunity for workers to profit or lose based on their skills? For instance, a contractor can make more money by finishing ahead of schedule.
- Does the worker invest in the tools and equipment necessary for the job?
- Is the relationship ongoing? A contractor who has worked with a company full-time for years may be considered an employee.
- How much control does the company exert?
- Does the business rely on the contractor for integral work? A content company that hires freelance content writers would be an example.
- Is specialized knowledge or expertise required for the job?
The final rule states that all of these factors are not equal but should be considered in a “totality of the circumstances” approach.
What Does This Mean for Small Business Owners?
If you’re a business owner, these guidelines could significantly impact how you classify your workers. Many independent contractors now fall under the employee category, which means you’ll have to pay minimum wage, overtime, and other benefits guaranteed to employees.
Businesses that rely heavily on freelance work may have to reorganize their entire workflow, as transforming each contractor into an employee could be cost-prohibitive.
Failing to comply with the new final rule, however, could ultimately be even more damaging. Additional challenges include:
- Contractor Resistance: Some contractors may resist reclassification because they prefer the flexibility associated with freelance work. Unfortunately, even forming an LLC may not protect them from the DOL’s final rule.
- Legal Action: Contractors who feel they’ve been misclassified can sue your company.
How to Adapt
Conduct a Worker Classification Audit
One of the first steps to prepare for the 2024 Independent Contractor Final Rule is to thoroughly audit your current worker classifications. Identify your independent contractors and reevaluate their roles based on the new criteria.
If a contractor is misclassified, you’ll have to decide whether making them employees or letting them go makes more financial sense.
Update Contracts and Agreements
Imprecise or confusing language could lead to trouble. Ensure your contracts and agreements are up-to-date and clearly define the relationship’s expectations.
Consult with Legal and Tax Professionals
Consulting with legal and tax professionals can help you see where your business stands with this new rule. They can also advise you on any potential changes to your current practices.
Document Everything
Document the rationale behind your classification decisions in case there are questions later. It is also smart to document all communications, payments, and work details involving independent contractors.
Final Thoughts
The 2024 Independent Contractor Final Rule changes how businesses classify employees and independent contractors, with the new guidelines favoring employee status in many cases.
To make sure your business stays compliant, you can conduct a classification audit and review your current contracts. If you have questions about the tax implications, contact Kondler & Associates, CPAs, for expert guidance. Our team is here to help you every step of the way.
