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Gig Work Classifications Per the DOL Final Rule
Per the DOL’s final rule about worker classifications, should gig workers be classified as independent contractors or employees?
On January 9, 2024, the Department of Labor (DOL) released a final rule that outlines how to determine whether a worker should be classified as a 1099 independent contractor or W-2 employee. According to this final rule, most gig workers should now be classified as employees.
While this final rule is set to take effect March 11, 2024, many employers are struggling to understand whether this impacts their gig workers.
Why does the DOL care about worker classification?
There are several laws that provide employees with rights and protections not offered to independent contractors or gig workers.
For example, the Fair Labor Standards Act (FLSA) was enacted in 1938 to require minimum wage and overtime pay standards for W-2 employees. Other laws, rights, and benefits for employees include anti-discrimination laws, union protections, social security, workers’ compensation coverage, unemployment insurance, employee health benefits, and paid time off/sick leave.
However, these protections and rights have an expensive price tag for employers, which typically cost between 20-40% of a worker’s wage. That makes the thought of paying someone as an independent contractor extremely attractive; but in many instances, it deprives them of their employee rights and protections. The misclassification of employees also makes the playing field uneven for competitors who pay employees according to law.
What are the factors to be analyzed for determining employee vs contractor status?
The DOL final rule reverts to a standard under the FLSA that existed prior to 2021 where all factors are considered and “no one factor weighs more heavily than another.” Per the final rule, the factors to consider when analyzing worker status include:
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and the company
- Degree of permanence of the work relationship
- Nature and degree of control
- Extent to which the work performed is an integral part of the potential employer’s business
- Skill and initiative
Here is how each of these factors should be broken down to understand why gig workers should legally be classified as employees.
1. Opportunity for profit or loss depending on managerial skill
When seeking to understand this factor from a gig worker’s perspective, the key phrase is “depending on managerial skill.” This means that a worker’s opportunity for profit or loss is not based on their own schedule to work longer or to pick up odd jobs, but whether they can:
Negotiate the charge or pay for work provided
- When the employer or gig apps control their assignment or availability of hours or jobs, this does not reflect managerial skill.
Accept or decline jobs or choose the order and/or time in which the jobs are performed
- Available work and pay should not be based on a gig app’s algorithm, but on the worker's managerial skill.
Engage in marketing, advertising, or other efforts to expand their business or secure more work
- Is the gig worker their own boss who advertises their own services on their car window, or do they advertise the employer's business? Are they able to connect with or solicit customers?
Make decisions to hire others, purchase materials and equipment, and/or rent space
- Have the worker's marketing efforts promoted their business in a way that they need to hire workers and/or expand their resources and space?
According to insight from the National Employment Law Project (NELP):
“The guidance appropriately suggests that this factor would weigh in favor of independent contractor status for a freelance writer who has the power to negotiate the price of her projects in an arms-length transaction, but not for a home care worker who signs a contract with take-it-or-leave it pay terms or for an app-based worker whose pay is set by the company’s black box algorithm.”
If the worker is at risk of loss due to their own managerial decisions, they are likely a 1099 contractor in business for themselves. But if they had no managerial decisions to help prevent the company from going under and their only loss was the need to do a new job search, they are an employee.
2. Investments by the worker and the potential employer
The focus on this factor should be on comparing the investments of the worker with those of the potential employer (perhaps on a smaller scale) to determine whether the worker is operating independently.
Is a vehicle considered an investment?
For gig workers who use their own car to deliver food or perform other services, the DOL specifies it does not count as an investment for this factor. The final rule explains, “The investments of a true independent contractor . . . must be capital or entrepreneurial, as opposed to tools that a worker is required by a business to have in order to perform a job.”
Are workers' fees considered an investment?
Instances where employers shift fees to workers do not necessarily constitute worker investments, either.
For example, a nursing agency may pass on the cost of malpractice insurance to its nurses, as required by law or regulation. However, this does not mean those nurses are 1099 contractors. If the nurse can choose among policies based on price and coverage and does so independently to procure a policy, then this could be indicative of an independent contractor. But the totality of the circumstances must be considered.
3. Degree of permanence of the work relationship
This factor should be focused on the work’s permanence resulting from the worker’s own initiative and decision-making power.
In determining permanence, it’s not just the length or definiteness of the work, but the nature of the work’s permanency. (Seasonal or temporary work does not indicate independent contractor classification, as seasonality may be industry-specific.)
According to the NELP, “A worker whose work relationship is indefinite or continuous or who is performing a job that is regularly required by the business is more likely to be an employee.” In other words, if a job seeker refers to gig economy apps to find work that fits their own hours as available or required by a business, they are an employee of that company. Why? Because that relationship is indefinite and continuous for doing something that is regularly required by the company.
A true independent contractor has a defined duration (typically there is a specific number of days, weeks, or months defined as the timeline), is project-based, and may be sporadic due to the worker being in business for themselves.
The DOL also explains that working multiple gigs does not indicate independent contractor status, either. When workers have multiple gig apps to find jobs and earn extra cash, this is more likely their way of creating a living wage in an underpaying economy rather than an exercise of their own business judgment.
4. Nature and degree of control
When determining control, you need to assess how much control you have over your workers such as:
- Ability to supervise performance (including by means of a gig app)
- Reserving the right to discipline workers
- Placing demands or restrictions on workers that do not allow them to work for others or according to their own flexible schedule
- Controlling prices or rates for services (including by means of algorithms)
- Marketing services or products provided by the worker
The more control you have over the worker, the more likely they are an employee. From requiring they pass a background check and maintain a valid driver's license, to determining when they get paid and earn rewards, these are manifestations of control that imply an employee-employer relationship.
Per the NELP, “For many on-demand and app-based [gig] workers, so-called flexibility is monitored, mediated, supervised, and carefully managed by big-brother type behavioral nudges that allow the companies to control when, how long, and how they work.”
5. Extent to which the work performed is an integral part of the potential employer’s business
This factor focuses on whether the work performed is an integral part of the employer’s business and not on whether an individual worker is integral to the company. According to the DOL, “if the [hiring entity] could not function without the service performed by the workers, then the service they provide is integral.”
In other words, if the job done by the worker is critical, necessary, or central to your principal business, they are an employee. If the tasks they are performing or services they provide are something you market to your customers, they are an employee.
In the 2013 case Scantland v. Jeffry Knight, Inc., the plaintiffs were former technicians who installed and repaired cable, internet, and digital phone services for Jeffry Knight, Inc, an installation and repair service contractor for Bright House Networks, a cable company. Because the plaintiffs had been paid as independent contractors, they were not paid overtime or minimum wage and argued they deserved these protections.
While exploring the factor analysis to determine classification status in this case, the court said the following:
“If Knight had truly outsourced such a large portion of its business, as would be true if plaintiffs were independent contractors, then the company would retain far less control over the business. However, because of Knight's concern with the quality of the services it provides through this arrangement, it does, as one might expect, control the relationship in much the same way a company would control its employees. The technicians' integral part in Knight's business follows the ‘usual path of an employee.’”
This analysis is consistent with how the DOL’s final rule views work as integral to the employer’s business.
6. Skill and initiative
The first focus of this factor is on whether the worker uses specialized skills to perform work. If a worker is dependent on training from the employer to perform the work or does not need specialized skills, they are likely an employee.
However, both employees and independent contractors may be skilled workers, so the next point of focus is on whether the worker uses those specialized skills to contribute to business-like initiatives for being in business for themselves.
For example, if a worker has specialized skills for culling trees, fusing aluminum, or cleaning ceiling vents, but does not have power over business decisions, they are an employee. Their specialized skills must be in conjunction with being in business for themselves to show “skill and initiative” for being an independent contractor.
Do workers have to satisfy all the economic reality factors to qualify as an independent contractor?
Per the DOL, “No, there is no single factor or set of factors that automatically determine work status as an employee or independent contractor. All economic reality factors are weighed to assess whether someone is economically dependent on an employer or if they are truly in business for themselves.”
Final thoughts on the DOL rule in a gig economy
When considering all the economic reality factors, even those who use the best gig apps should legally be classified as employees. According to the Washington Post, “The new rule will make it easier for a wider range of workers to gain employee status, including nail salon technicians, landscaping workers, home health aides, retail workers, call center workers and security guards.”
As you carefully analyze the economic reality factors regarding your workers, you may discover the need to correct worker classifications. And an uptick in employee headcount could potentially make your business subject to more laws and regulations.
Staying on top of compliance issues can be complex and becomes increasingly difficult when you have employees in multiple states. From payroll compliance and labor laws to employee accommodations and OSHA requirements, there are many potential issues that could easily overwhelm the most seasoned of employers.
That is where Stratus HR comes in. Our team of certified HR experts is here to help your business be compliant with all governing laws and regulations. We seamlessly take care of the backend human resources processes and issues so that your team can continue building your business.
For more information, book a free consultation and our team will contact you shortly!