Close this search box.
Close this search box.
Three business professionals engaged in conversation, smiling as they discuss matters in a bright, modern office environment - Dol six-factor test.

Unlocking Clarity: DOL’s Six-Factor Test for Employee vs. Independent Contractor

The U.S. Department of Labor (DOL) recently finalized a rule aimed at clarifying how businesses classify workers under the Fair Labor Standards Act (FLSA). This rule, taking effect March 11, 2024, replaces the previous 2021 rule and establishes a six-factor test for determining employee vs. independent contractor status.

This change aims to bring consistency and clearer guidance for businesses, ensuring they understand their responsibilities under the FLSA. However, it’s important to note that this rule only applies to the DOL’s interpretations and doesn’t impact independent contractor classification under individual state laws, such as the “ABC” test used in California and other states.

Navigating Worker Classification: Understanding the Key Factors

Businesses navigating these changes should carefully consider the six factors outlined in the new rule, which will be discussed in further detail in the following sections.

  1. Opportunity for Profit or Loss: This factor assesses the worker’s control over aspects like pricing, accepting or declining work, and expanding their business reach. If the worker’s ability to earn profit or incur losses relies heavily on their own managerial skills and effort, they’re more likely to be classified as an independent contractor.
  2. Investment by the Worker and the Employer: This factor examines the financial resources invested by both parties. Investments typically associated with independent contractors include equipment, tools, or services that enhance their ability to operate independently and attract more clients.
  3. Degree of Permanence of the Work Relationship: This factor considers the duration and nature of the work arrangement. A continuous, ongoing relationship leans towards employee classification, while project-based or temporary engagements suggest an independent contractor status.
  4. Nature and Degree of Control: This factor focuses on the level of control exercised by the potential employer over the worker’s activities. Examples include setting schedules, providing detailed instructions, or supervising work performance. A high degree of control exercised by the employer indicates an employer-employee relationship.
  5. Extent of Work as Part of the Employer’s Business: This factor assesses the criticality of the work performed to the core functions of the employer’s business. If the work is essential to the daily operations and directly contributes to the success of the business, it points towards an employee classification.
  6. Skill and Initiative: This factor evaluates the degree to which the worker utilizes specialized skills and demonstrates business-like initiative. Workers who operate autonomously, applying their skills independently without close supervision, are more likely to be classified as independent contractors.

While the six factors outlined guide classification under the DOL’s FLSA, it’s crucial to remember that worker classification also has tax implications. The Internal Revenue Service (IRS) utilizes a separate, 20-factor control test for determining tax purposes. Businesses should be aware of both sets of criteria to ensure compliance across different areas.

For those seeking further guidance on navigating these complexities and ensuring compliance, consulting with legal professionals is highly recommended. They can provide valuable assistance and clarity specific to your situation.

By understanding the key factors, seeking appropriate guidance, and staying informed, businesses can navigate the complexities of worker classification with confidence, ensuring compliance with federal regulations and protecting their interests in the evolving labor landscape.

JS Morlu LLC is a top-tier accounting firm based in Woodbridge, Virginia, with a team of highly experienced and qualified CPAs and business advisors. We are dedicated to providing comprehensive accounting, tax, and business advisory services to clients throughout the Washington, D.C. Metro Area and the surrounding regions. With over a decade of experience, we have cultivated a deep understanding of our clients’ needs and aspirations. We recognize that our clients seek more than just value-added accounting services; they seek a trusted partner who can guide them towards achieving their business goals and personal financial well-being.
Talk to us || What our clients says about us