Independent workers make up about 45% of the U.S. workforce, according to a 2023 report by MBO Partners, a platform dedicated to their needs. That's more than 72 million Americans altogether, with nearly 30 million of them working independently full-time.
And while many of them have chosen the freedom that this type of lifestyle brings, some have been misclassified and should instead be considered employees. This misclassification could lead to a loss in income, ineligibility for state and federal unemployment systems and so on. Nearly 10% of independent contractors make less than $7.25 per hour, according to the National Employment Law Project.
"Misclassification is a problem that affects many low-paid industries like construction, transportation, home health care," says Sally Dworak-Fisher, senior staff attorney at NELP. But "people in every occupation at all types of pay levels" can be vulnerable to it, says Samantha Sanders, director of government affairs and advocacy at the Economic Policy Institute.
A new rule change under the Fair Labor Standards Act, set to take effect on March 11, is aimed at curbing this misclassification. Here's what it means for workers.
The DOL uses the economic realities test
The Department of Labor uses what's called an economic realities test to determine whether a worker should be classified as an independent contractor or an employee. Under the coming rule change, the test uses six metrics to analyze that relationship:
- Opportunity for profit or loss depending on managerial skill: This factor covers a worker's ability to meaningfully negotiate their price of services or goods and make business decisions regarding marketing, both of which suggest independent contractor status.
- Investments by the worker and the employer: "Is the worker putting in the work to buy tools, equipment, other expenses that they need to do the business or is the potential employer providing it?" says Sanders. If the latter, that could suggest employee status.
- Degree of permanence of the work relationship: "A relationship of indefinite duration suggests employee status," according to NELP.
- Nature and degree of control: This factor looks at the employer's ability to supervise the work, their ability to set the worker's schedule, their ability to limit the worker's freedom to work for others, etc. If the employer has a high degree of control, the worker might be considered an employee.
- Whether the work performed is an integral part of the employer's business: NELP gives the examples of "a janitor working for a janitorial business, a tomato picker working for a farm, and a food delivery worker working for an app-based delivery company" as workers doing the "central work of the employer's business."
- Skill and initiative: This metric considers both if the work requires special skills and if those skills help the worker "exercise business-like initiative," according to NELP. If not, the worker might be considered an employee.
These metrics aren't exactly new.
In fact, the rule change is simply a reversion to the rule stipulating who is and isn't an independent contractor that existed before a 2021 change placed emphasis on two elements of the economic realities test, whether or not a worker can control conditions of work and their opportunity for profit and loss.
According to the DOL's press release about the new rule, the 2021 change was "not consistent with the law and longstanding judicial precedent."
Rule applies to those paid less than $7.25 per hour
The updated rule will likely most affect workers paid less than the federal minimum wage of $7.25 per hour, or $10.88 per hour in overtime pay when they work more than 40 hours per week.
In order to benefit from the rule change, "you must be both a covered employee (and not an independent contractor running your own business, which is what the guidance speaks to) and be denied the wages guaranteed by the law," says Dworak-Fisher.
If you believe you've been misclassified and have not been paid the federal minimum or overtime wages, the DOL recommends gathering information such as the name of the company you work for and how and when you're paid, then filing a claim online or on the phone with the Department of Labor, which will decide if an investigation is the best course of action.
"But for this very short-lived rule from 2021," Dworak-Fisher says, "we're going back to the analysis that courts have used for almost 80 years."
"It is not any sort of massive sea change," she says. And any independent contractor who wants to keep that classification can continue to do so.
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