Manager showing employee something on a tablet inside an office.
A new Department of Labor ruling, taking effect spring 2024, creates a more complex process for classifying full-time employees versus independent contractors. — Getty Images/Tom Werner

A new Department of Labor regulation that changes the way employers classify employees versus independent contractors is creating confusion among small business owners, who may be using independent contractors, or be operating as independent contractors. The new regulation, which is scheduled to take effect March 11, creates a process with much greater uncertainty for determining whether a person working for your small business is considered by the Department of Labor to be a full-time employee or an independent contractor. CO— interviewed U.S. Chamber of Commerce policy experts Marc Freedman, Vice President, Employment Policy, and Tom Sullivan, Vice President, Small Business Policy, to get clarity on this issue.

[Read our article here on how the IRS classifies 1099 independent contractors.]

What is the difference between a W-2 employee vs. a 1099 contractor?

Marc Freedman: A W-2 employee is an employee of the company, which means the company is responsible for withholding income taxes and Social Security payments, as well as other tax requirements. If someone is a 1099 contractor, they are responsible for these tax requirements on their own.

There’s a new rule from the Department of Labor that deals with independent contractors. What does it say and what impact will it have?

Marc Freedman: The Department of Labor’s new regulation resets how someone is defined as an independent contractor or an employee under the Fair Labor Standards Act (FLSA), which covers minimum wage and overtime. The new regulation will force companies who hire independent contractors to review their agreements to make sure they can continue as independent contractors. The regulation will mean some workers will look more like employees, which will force these companies to decide whether to make someone an employee or discontinue the independent contractor relationship.

What are you hearing from small businesses about how this is impacting their hiring practices?

Tom Sullivan: Use of technology enables solopreneurs to compete against larger competitors. Entire enterprises can be constructed through chains of independent contractors working together to fulfill a business purpose and service a need or series of needs. The Department of Labor upsets this evolving entrepreneurial dynamic and, instead, solidifies an existing worker and employee corporate structure that is less flexible and less dynamic.

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Many independent contractors call themselves 1099s. How does the new DOL rule affect these people?

Marc Freedman: The term “1099” comes from the tax form independent contractors receive from the IRS at the end of the year showing what they have earned. The IRS and DOL have different definitions for who is an independent contractor. In general, companies will treat someone as an independent contractor or an employee for both IRS and DOL purposes. The new DOL rule does not affect whether someone would be an independent contractor under the IRS’s definition.

Why does the DOL care whether someone is an independent contractor or an employee?

Marc Freedman: The DOL is concerned with whether workers are paid the minimum wage, and whether they are paid the proper amount of overtime if they work enough hours. If someone is classified as an independent contractor, they are not covered by these requirements. The DOL believes that many workers are misclassified as independent contractors and should be classified as employees and therefore covered by the FLSA’s protections. The new regulation will allow DOL to decide that more independent contractors should be classified as employees.

What is your best advice to a small business owner who is trying to determine whether they should hire an independent contractor?

Tom Sullivan: I just met with a small business owner from Lansing, Michigan. Many of her employees worked for two generations of the business and her employees are what she cares about most. She has a handyman who is an employee of her company. That handyman wants to run his own business and does not want to be considered a W-2 employee anymore. This owner wants to fulfill the handyman’s wishes, but had to hire an attorney to ensure the process meets federal Department of Labor requirements, IRS requirements, and Michigan’s Unemployment Agency requirements so she does not get in trouble. My best advice to any small business owner is to be sure you consult with your attorney and accountant when making these decisions.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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