Attention New York Employers: New Federal and State Regulations on Independent Contractor Classification

The Department of Labor (“DOL”) issued a Final Rule, effective March 11, 2024, that provides guidance for employers on classifying workers as either “independent contractors” or “employees.” The Final Rule clarifies and modifies the criteria used for classification. Below, we detail these changes and discuss how they may impact your business in light of existing regulations in New York.

Understanding the New Federal Rule

Historically, the classification of workers as either employees or independent contractors has relied on an “economic realities” test. The new Final Rule introduced by the DOL continues to use this test but emphasizes a balanced six-factor analysis where no single factor is dominant. These factors are designed to lean towards an “employee” classification. They include:

Opportunity for profit or loss depending on managerial skill:

• The “DOL” will evaluate whether the worker can influence their economic success through managerial skill or business judgment.
• Indicators of independent contractor status include the ability to negotiate pay, select and schedule jobs, engage in marketing, make hiring decisions, and invest in materials or business space.

Investment in the Work:

• The nature of a worker’s investment can affect their classification.
• Investments that are capital or entrepreneurial, such as purchasing equipment or expanding operational capabilities, suggest independent contractor status.
• Conversely, costs imposed by an employer, like specific tools or uniforms, typically indicate an employee relationship.

Permanence of Relationship:

• An ongoing, indefinite, or exclusive work relationship generally indicates employee status.
• Alternatively, a relationship that is temporary, non-exclusive, or project-based often supports independent contractor status, especially if it aligns with the worker’s business initiatives.

Degree of Control:

• The extent of control or oversight by the employer is crucial.
• Factors like setting schedules, supervising tasks, or limiting outside work suggest an employee relationship.
• However, measures taken solely for compliance with legal standards do not necessarily indicate control indicative of employment.

Nature of the Work:

• If the work is essential to the business, this typically means employee status.

Skill and Initiative:

• The use of specialized skills and the initiative to operate independently are traits of an independent contractor.
• Dependence on the employer for necessary training or work direction leans towards an employee classification.

New York’s Legislation

Parallel to the federal regulation, New York State has enacted its own laws regarding independent contractor agreements. , The state-wide act is largely reflective of New York City’s “Freelance Isn’t Free” Act from May 2017.

Under the State legislation, any service arrangement amounting to $800 or more, whether under a single contract or combined with other contracts for services between the same parties in the preceding 120 days, requires a formal written agreement.

This agreement must outline:

• names and addresses of hiring party and contractor;
• an itemization of all services (and their value) to be provided;
• the rate and method of compensation;
• the date the contractor must be paid (or the mechanism for determining payment dates); and
• the date by which contractor must submit a list of services rendered (invoices).

Companies must provide their independent contractors with a physical or electronic copy of the agreement and keep a copy of the agreement for their records for six years.

Understanding and adapting to these new regulations is crucial for maintaining compliance and avoiding potential legal challenges. Our team is ready to assist you in assessing and adjusting your agreements with independent contractors to align with these latest legal requirements. with these latest legal requirements.

If you have questions regarding how these changes may affect your current or future contractual relationships with independent contractors, contact Jonathan Adler, Casey Hail, or Melanie Sarver.