12 mei 2025
Michael Matherly - Head of Global Compliance at Bubty | Featured in The Compliance Capsule, Subscribe here.
We interrupt our regularly scheduled series Triggers vs. Findings of Fact to bring you a regulatory update on two recent US announcements from the department of labor, one from the federal agency and one from the New Jersey state agency. In this issue of The Compliance Capsule we provide a summary narrative of The Future of Compliance podcast conversation I had with employment law attorney Eric Meyer, Founding Partner of Pierson Ferdinand. If you would like to hear the conversation Eric and I had about these two DOL announcements, follow the link below to The Future of Compliance podcast show page.
Feds Loosen and States Tighten: How are we to classify workers now?
Navigating the rules around classifying workers as employees versus independent contractors has always been complex. Recently, however, the waters have become even murkier. While the federal Department of Labor (DOL) seems to be easing its stance slightly, state level departments of labor, like the New Jersey agency announced last week, are doubling down on stricter tests for the classification of independent contractors. This divergence leaves many businesses wondering: how exactly should we classify workers today?
The Federal Shift: Back to the Future?
At the federal level, specifically within the DOL's Wage and Hour Division, there's been a notable change. As of May 1st, the division announced it would no longer enforce the independent contractor rule finalized earlier in 2024 under the Fair Labor Standards Act (FLSA). Instead, it's reverting to an older standard known as the "Economic Realities Test" which examines the totality of circumstances to determine if a freelancer is economically dependent on the company. If so, then employee is the proper classification; if not, then independent contractor. While the test requires a review of these six unique factors, no single factor is decisive:
The worker's opportunity for profit or loss;
The worker’s investment (in the engagement) compared to the employer's;
The permanence of the work relationship;
The nature and degree of the employer's control over the work performed or the worker;
The extent to which the worker’s services are integral to the company's business; and
The worker's skill and initiative relative to the services being provided.
This isn't a brand-new invention; it's based on guidance from 2008 (Fact Sheet 13) and a 2019 opinion letter (FLSA 2019-6). While the 2024 rule was also technically a form of an economic realities test, this older version is generally viewed as slightly more employer-friendly.
What does this mean for businesses?
DOL Audits: If you face a DOL audit, the standard applied might be marginally more favorable towards classifying a worker as an independent contractor. However, outcomes are highly fact-specific.
Court Cases: Federal courts handling FLSA misclassification lawsuits aren't bound by DOL guidance. They follow their own established legal precedents, which may or may not align perfectly with the DOL's current approach.
State Law: This federal shift has no impact on state laws, many of which have stricter tests.
This kind of change often reflects a political shift. Democratic administrations typically favor more employee-protective standards and Republican administrations leaning towards more business-friendly interpretations. The current move aligns with a slightly more employer-friendly stance compared to the rule it replaces.
State Tightening: New Jersey DOL Proposes a Stricter ABC Test
While the federal approach loosens, states like New Jersey are moving in the opposite direction - tightening. New Jersey, often considered a high-risk state for contractor classification alongside California and Massachusetts, has proposed new regulations to clarify and apparently strengthen its already stringent "ABC test."
The ABC test presumes a worker is an employee unless the employer can prove all three of the following conditions, commonly referred to as the “prongs:”
(A) The worker is free from the control or direction of the hiring entity.
(B) The work performed is outside the usual course of the hiring entity's business.
(C) The worker is customarily engaged in an independently established trade, occupation, or business.
The proposed New Jersey regulations add significant detail:
Prong A (Control): The proposal lists nine specific factors to evaluate control. Importantly, exercising control merely to ensure legal compliance still counts as control by the hiring entity. The 9 control factors of Prong A as listed in the New Jersey agency’s proposed rule change:
Whether the individual is required to work any set hours or jobs;
Whether the putative employer has the right to control the details and means by which the services are performed by the individual;
Whether the services must be rendered by the individual personally;
Whether the putative employer negotiates for and acquires the work performed by the individual;
Whether the individual’s rate of pay is fixed by the putative employer;
Whether the individual bears any risk of loss for the work he or she performs;
Whether the individual is required to be on call, on standby, or otherwise available to perform services at set times determined by the putative employer, even if the individual does not actually perform services at such times;
Whether the putative employer limits the individual’s performance of services for other parties, such as by limiting the individual’s geographic area or potential clientele; and
Whether the putative employer provides training to the individual.
Prong B (Usual Course of Business): This is a major point of attention. The proposal clarifies that work performed at a customer's site could be considered the hiring entity's place of business if the core work is done there. For example, a painting company is hired by a residential home owner to paint their house - the customer’s house would now be considered the company’s place of business. This potentially broadens the scope significantly, making it harder to satisfy Prong B, especially for businesses like consultancies where work is inherently performed off-site.
Prong C (Independent Business): Simply having the worker form an LLC, obtain a license, or get their own insurance is not enough to prove they run an independent business. The focus is on the reality – does the worker market their services, have multiple clients, and truly operate a separate business? It's about function over form.
These proposed rules in New Jersey, which are likely to be adopted in a form close to the proposal, would apply broadly across state laws governing unemployment, wages, disability, and sick leave.
How Should Businesses Respond?
This federal loosening combined with state tightening creates a confusing picture. Here’s what to keep in mind:
State Law is Often King: If you operate in a state with a strict ABC test (like New Jersey, California, Massachusetts), that state's test likely dictates your classification obligations, regardless of federal DOL guidance.
Function Over Form: Agreements labeling someone an independent contractor, or requirements for them to form an LLC, won't save you if the reality of the working relationship looks like employment. Agencies and courts look at what's actually happening.
Don't Lower Your Guard: The slight federal shift isn't a green light to reclassify workers freely. The risks of misclassification remain substantial, especially under strict state laws.
Review and Seek Counsel: Now is the time to carefully review your independent contractor relationships through the lens of the applicable tests (both federal and state). Given the complexity and the significant financial and legal risks, consulting with experienced employment law counsel is crucial. Avoid trying to navigate this alone, especially when misclassification errors can stem from seemingly simple oversights.
Conclusion
The landscape of worker classification is constantly shifting. Staying informed about developments at both the federal and state levels and proactively ensuring the propriety of IC compliance screening is essential for businesses utilizing independent contractors. If your company is not properly screening freelancers or if your team is not up to date on the latest regulatory environment, then please consider a Regulatory Landscape Update and compliance solution overview from the Bubty Compliance Services team.
Next Issue
We will return next week to begin our deep dive into how findings of fact, even more so than the triggers we have previously examined, are the real misclassification risks companies should be worried about.
Until next Wednesday, stay compliant and be happy.
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