Manufacturers who hire independent contractors to support their business should be aware of new guidance impacting how they classify these workers. 

Earlier this year, the Biden administration rescinded a 2021 rule that made it easier to classify workers as independent contractors under federal wage and hour rules. Instead, now they will be forced to follow a previous standard, expected to result in manufacturers having more workers being classified as employees.  

The New Rule

The Department of Labor (DOL) issued a final rule providing guidance on when to classify a worker as an independent contractor under the Fair Labor Standards Act (FLSA). The FLSA requires employers to pay non-exempt employees at least the federal minimum wage for hours worked and overtime for hours in excess of 40 in one week, along with certain recordkeeping requirements. It does not mandate the same payment policies or recordkeeping for those who are considered independent contractors. 

Effective beginning March 11, 2024, this new rule requires employers to apply a six-factor test to guide the assessment of the economic realities of the working relationship and to help answer the question of economic dependence under the FLSA:  

1. The opportunity for profit or loss, depending on managerial skill 
2. Investments by the worker and the potential employer 
3. Degree of permanence of the work relationship 
4. Nature and degree of control 
5. Extent to which the work performed is an integral part of the potential employer’s business 
6. Skill and initiative 

This test relies on the totality of the circumstances where no one factor is determinative, placing more emphasis on employee interpretation. Employers should also note the DOL’s test applies only to the FLSA, and many states have their own tests that are applied to state-level wage and hour claims. 

Preparing for the Change 

While there is some uncertainty surrounding the new rule, manufacturers should consider existing and future independent contractor arrangements, including how they fit within the new framework as well as existing applicable state and local frameworks. To help guide employers, the DOL created a Final Rule FAQ page, which answers some of the questions surrounding the new rule.  

 It is recommended you consult with your labor law counsel to determine the classifications of your workers. However, Doeren Mayhew’s manufacturing advisors are here to help you understand the larger tax impact of this new rule on your business.