Distinguishing between an employee and an independent contractor is not a simple process, and the consequences of misclassifying one or the other can be serious for workers and their employers.

To address tension that has developed between case law and administrative guidelines, the U.S. Department of Labor (DOL) recently announced a final rule to provide clearer and more consistent guidance to businesses.

The final rule, which was announced on Jan. 9, 2024, and will become effective on March 11, will implement several changes.

It will rescind a previous rule adopted by the agency in 2021. In its place, the new rule will implement several new and more comprehensive guidelines for determining when a worker is an independent contractor. Most significantly, the new rule will implement six factors of analysis, including the worker’s opportunity for profit or loss depending on managerial skill, investments by the worker and the employer, degree of permanence of the work relationship, the nature and degree of control that the employer has over the worker, the extent to which the work performed is an integral part of the employer’s business, and the skill and initiative involved in the work performed. All these factors must be considered together, and no one factor has a predetermined weight or significance.

The DOL believes this new rule is more consistent with many years of court interpretations of the Fair Labor Standards Act, which was intended to protect workers’ rights concerning minimum wages and overtime pay.

In shaping the final rule, the DOL received thousands of comments from stakeholders at forums and during the comment period over the last year and a half.

Misclassifying an employee as an independent contractor can be considered a serious issue that deprives workers of their rights to fair compensation.

According to the DOL’s website, “This final rule will reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.”