The U.S. Department of Labor issued a final rule on determining independent contractor status under the Fair Labor Standards Act.

Under the new rule, which takes affect March 11, the DOL will consider the totality of circumstances in each case to determine whether a worker is an employee or independent contractor. These factors include, but aren’t limited to:

The worker’s opportunities for profit or loss based on managerial skills that affect the worker’s economic success or failure in performing the work.

The worker’s entrepreneurial investment or capital in the costs of performing the work.

The degree of permanence in the working relationship.

The potential employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship.

Whether the work performed is an integral part of the employer’s business.

Whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative.

Any additional relevant factors indicating whether the worker is in business for him or herself as opposed to being economically dependent on the potential employer for income.

What does the new rule mean for employers? In some ways, it means little. In others, it means a lot.

First, the new list of factors isn’t radically different than previous tests. But it’s drafted in broader language that allows the DOL to classify more workers as employees. This likely will result in more legal claims by workers seeking back pay and overtime that were deprived them by their classifications as independent contractors.

Second, this is only one test for independent contractor status among many. For example, the IRS uses a 20-factor test. The National Labor Relations Board uses an 11-factor test. But all tests focus on two considerations. How free are workers from the control of the organizations to whom they provide services? Do workers engage in independent businesses or trades?

Imagine, for example, the heat goes out at your business. If you have an HVAC person employed in house, he puts in regular hours and fixes the heat when and how his supervisor directs him to do so. No matter how competent the employee is or how fast they complete the repair, they generally make the same hourly pay. And your business is in the business of making widgets, not servicing heating equipment. But if your business calls an HVAC service, it fixes the heat on its schedule. The business calls the service because it has experience to fix the heat, and the contractor sets the rates based on experience and expertise. The contractor is retained because the business is all about servicing HVAC. And the contractor provides services to numerous customers.

Finally, the Colorado Department of Labor and Insurance (CDLE), aggressively investigates and penalizes employers who fail to pay wages because of employer misclassification. The CDLE’s Interpretive Notice and Formal Opinion No. 10 provides guidance on the differences between employees and independent contractors at https://cdle.colorado.gov/infos.

The biggest risk for most employers is assessment of back taxes and penalties for unemployment insurance and the cost of injuries to workers the business misclassified as independent contractors and didn’t cover under workers’ compensation insurance.

The Colorado Employment Security Act (CESA) and Workers’ Compensation Act (WCA) set the standards for worker classification for unemployment insurance and workers’ compensation. They’re similar to the standards under the Colorado Wage Act, but not identical.

Consistent with new DOL rule, the Colorado Supreme Court ruled in Industrial Claim Appeals Office v. Softrock Geological Services that for the purpose of determining if a worker is an independent contractor under the Colorado Employment Security Act, whether the worker is customarily engaged in an independent trade, occupation, profession or business is resolved only by examining the totality of circumstances in the relationship between the worker and employer. No single factor or set of factors are dispositive.

In my experience representing employers on worker classification issues, sometimes it’s the small additional relevant factors under the totality of the circumstances that put employers at increased risk of liability for worker misclassification. These might include:

Paying workers by the hour rather than the project.

Requiring a specific work schedule.

Requiring workers to use the business’s tools to perform services.

Requiring workers to use the business’s uniforms, email addresses, phone numbers or business cards.

Paying putative contractors in their own names rather than trade names or corporate identities.

Improperly classifying employees as independent contractors can prove a costly and disruptive mistake for employers. It can result in liabilities that include back wages and overtime, back unemployment insurance premiums, fines, penalties and even criminal liability under the FLSA and Colorado law. The Employers Council can assist consulting and enterprise members in determining the proper classification of workers and provides electronic guidance and resources.