New DOL Guidance on Worker Classification

In New Jersey, workers are categorized as employees or independent contractors. Misclassifying an employee as an independent contractor (IC) deprives the worker of fundamental rights and protections. For example, misclassifying workers can result in wrongful denial of minimum wage, workers’ compensation benefits, and other benefits. Unfortunately, correct worker classification is crucial and determining whether an individual is an employee or an independent contractor is often complex.

In January, the DOL released a new rule that modified the Department’s guidance on worker classification. The rule that went into effect on March 11 provides guidance to employers on how to evaluate who qualifies as an employee and IC under the Fair Labor Standards Act. According to the DOL, the new guidance is more consistent with the text and purpose of the FLSA. It is crucial for both employers and employees to understand what the new DOL rule says.

Overview of the New DOL Guidance

Before the DOL’s new rule went into effect, employers used to follow the 2021 Independent Contractor Rule. Under the 2021 rule, there were five factors that employers were required to consider when determining if a worker is an IC or an employee. Among the factors employers were to consider, the 2021 rule designed two factors (opportunity for profit and loss and control over the worker) as “core factors.” Those two factors carried more weight than the other factors.

The new DOL rule differs from the 2021 rule in that there are now six factors that employers must consider when determining whether a worker is an employee or an IC. The new rule also requires that all the factors be considered together, without any factor holding more weight than another.

Simply put, the new rule underscores that the main question is whether, as a matter of economic reality, an individual is economically dependent on the employer for work. If they are, then they are considered an employee. On the other hand, if a person is in business for themselves, they are an independent contractor.

The following are the six factors employers must consider when determining whether a worker is an employee or IC;

  • Worker’s profit or loss opportunity: An individual with the opportunity for profit or loss based on their judgment, initiative, or business acumen is likely an IC.
  • Worker’s investment vs employer’s investment: More investment by a worker makes it more likely that they are an IC.
  • The permanency of the employer’s and worker’s relationship: If the relationship is project-based or for a limited duration, the worker is likely an IC as long as the impermanence results from the worker’s independence as a business person.
  • Nature and degree of control: If an employer controls the worker’s pay, schedule, performance, and training, the worker is likely considered an employee.
  • Whether the work is integral to the employer’s business: If the work is central to the employer’s business, the worker is likely an employee.  
  • Skill and initiative: A combination of specialized skills and a business-like initiative may suggest a worker is an independent contractor.

It is crucial to note that the above is not the only test that applies to worker classification in New Jersey. Under the state’s unemployment compensation law, employers must use the ABC test when determining whether a worker is an employee or independent contractor. Click here to read about the ABC test.

Contact a New Jersey Employment Lawyer

For more information or legal help, contact our qualified New Jersey employment lawyer at the Trabosh Law Firm.

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