How the New Independent Contractor Rule Might Impact HR Professionals

When the U.S. Department of Labor (DOL) dropped its new independent contractor rule, it caused what Kimberly Prescott, SHRM-SCP, called “a lot of hullabaloo.” Prescott is the founder and president of Prescott HR, a consulting firm in Columbia, Md.

The final DOL rule reinstates an earlier standard that called for businesses to consider multiple factors at once when deciding whether a worker is an independent worker or an employee. It goes into effect March 11, 2024.

“Clients are saying they don’t know where to start or what to do,” Prescott said. “Employers are thinking they have all these new obligations; they may or may not. This [new rule] speaks to the analysis of whether a person is an employee or not. But it doesn’t help employers understand what their obligations may or may not be.”

Employers aren’t the only ones worried about the new rule. Independent contractors in hundreds of industries, including HR, are questioning what this means for their business and their ability to choose self-employment.

“I’m in an interesting position,” said Debra Best, SHRM-SCP. She founded her upstate New York HR consulting firm Deb Best Practices in 2012 and specializes in outsourced human resources and strategic hiring services. In 2021, she submitted comments on the rule, urging the DOL to keep the 2021 rule to protect legitimate independent contractors.

“I help my clients ‘color within the lines’ to ensure they classify employees and independent contractors correctly. [Misclassification] continues to be below the radar for non-HR/nonlegal, operations folks,” she said. “At the same time, I am a legitimate business owner. I meet every 1099 [independent contractor] characteristic on New York state and IRS requirements lists, yet there appears to be a movement afoot to make as many of us employees as possible, despite those clear boundaries.”

The new rule would require employers to use a totality-of-the-circumstances analysis, in which none of the six factors to be considered carry greater weight than any of the others. Even before the new rule was published, state and federal authorities amped up their 1099 audits, Best said.

“There continues to be a misconception that anyone can be a 1099 contractor if the employer—or contractor—wants it, despite the long requirements lists on the New York state and federal levels that clearly delineate the very real difference between a legitimate 1099 contractor and a legitimate employee,” Best said.

What Happens Next?

Prescott said that although the rule says it is “final,” changes could still be made.

“Law firms will start to weigh in on this in coming weeks. Because it is so new, people have not had time to tear it apart and give counterpoints, so I’m sure additional regulatory guidance will come out of it,” she said.

On behalf of independent contractors seeking to be able to retain their status, a group of writers and editors have filed the first official complaint. Others have announced plans to challenge the new rule. For example, the Associated Builders and Contractors said in a court filing that it planned to challenge the rule on behalf of businesses, and the Financial Services Institute, which represents independent broker-dealers and financial advisors, plans to relaunch a 2021 lawsuit to halt the DOL’s implementation of the new rule.

“It is taking away our rights to legitimately work for ourselves in our own legitimate businesses, providing real value for our clients,” Best said. “What about the rights of independent contract business owners like us?”

Advice to HR Professionals

HR practitioners should make sure they get clear on the six factors, Prescott advised. Best encouraged HR professionals who are independent contractors to work with their local chamber of commerce and business councils as advocates to challenge the rule.

For HR professionals working for employers, Prescott recommended talking with other leaders in the organization who make decisions to hire people on a contractor basis.

“As an in-house HR person, you’re often siloed, so you may never know if someone in operations might be working with a contractor because accounts payable are not reporting to you,” Prescott said. “HR needs to come to the front and work with the business leaders to let them know at a high level what this is, why it is important to do an analysis, or to hire an outside firm to help them do an assessment of who they are paying on 1099s.”

Katie Navarra is a freelance writer based in New York state.