What You Should Know About the New Regulations for Classifying Independent Contractors

Investment advisers, firms, and other practitioners in the finance and securities space will have to incorporate several new rules to ensure they continue to meet regulatory requirements. These include industry-specific rules and amendments, as well as changes to federal and state laws.

One such change is the classification of independent contractors, which will go into effect on March 11, 2024.

The Federal Department of Labor (DOL) issued a new standard on how independent contractors must be classified. These rules set parameters for businesses to determine whether a worker can be categorized as an employee or as an independent contractor.

In order to meet compliance requirements in determining independent contractors v. employees, businesses must apply the six factors set by the new federal test. It is important to note that the six factors listed are non-exhaustive.

The New Federal Rule
A worker can be classified as an independent contractor based on:

  1. Their opportunity for profit or loss
    The ability or opportunity to make or lose money is dependent on their entrepreneurial efforts and skills.
  2. Their investments compared to employer’s investments
    Capital or other investments made by the worker vs. investments made by the potential employer in the worker’s business.
  3. The degree of permanence of the worker and potential employer relationship
    Is the relationship project-based, or definite, or is it long-term and ongoing?
  4. Employer control
    Does the employer have control over the performance of the worker’s job, including how and when the job is performed, and does this control impede the worker’s ability to serve other clients?
  5. The extent to which the work performed is integral to the employer’s business.
    Are the worker’s tasks fundamental to the operations of the employer’s business?
  6. Worker’s skill vs. initiative
    Does the worker utilize specialized skills to perform the work as a job or as a business offering?

At the core of these six factors is the underlying question: Is the worker in business for themselves?

Learn more about the new federal law regarding the classification of independent contractors here: https://www.federalregister.gov/documents/2024/01/10/2024-00067/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act#h-90

It is crucial for businesses to review their employment contracts to ensure they meet the requirements of the new federal rule AND the requirements of state regulations on the classification of workers. For example, investment advisers who operate in or with California must meet California’s ABC test to accurately classify independent contractors. California’s ABC test is more stringent than the federal rule and can therefore put a business owner at risk of violating the rule.

California ABC Test
Employers in California can only classify a worker as an independent contractor if they can prove that the worker meets all three parts of the ABC test.

A: Control 
The worker is free from control and direction from the employer/hiring party and can perform the tasks on contract independently and without management.

B: Outside the usual course of business 
The independent contractor’s work is not integral to the core business of the employer/hiring party and is outside the usual course of their business.

C: Independent Business or Trade
The worker is independently engaged in a business or trade that performs the same kind of work.

What Can You Do in Preparation for the New Employment Classification Rule 
Jacko Law Group encourages thorough review of HR protocols and manuals and to update them accordingly to meet the new rule. In addition, we recommend notifying Equal Employees of any changes that affect their employment classification.

Also, businesses with California-based employees or independent contractors must address any gaps in meeting both federal and state requirements as the new federal law does NOT meet California state requirements of classification for independent contractors.

If you need assistance with classifying independent contractors or updating your firm’s protocols and procedures, please feel free to reach out to our legal team for assistance at 619.298.2880 or email info@jackolg.com.

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