On January 9, 2024, the U.S. Department of Labor issued a final rule to provide a clear definition of an “independent contractor” as outlined in the Fair Labor Standards Act (FLSA). This new rule replaces a previous 2021 rule and introduces a comprehensive six-factor test that focuses on assessing the “economic reality” of the relationship between a potential employer and a worker. The DOL’s intent behind this is to enhance clarity and ensure a more accurate determination of worker classification.
The new rule aligns with established judicial precedent and reverts to a “totality of circumstances” standard for determining the classification of a worker as an employee or an independent contractor. It considers six factors, with no individual factor carrying greater significance.
The six factors include:
- The degree to which the employer controls how the work is done.
- The worker’s opportunity for profit or loss.
- The amount of skill and initiative required for the work.
- The degree of permanence of the working relationship.
- The worker’s investment in equipment or materials required for the task.
- The extent to which the service rendered is an integral part of the employer’s business.
In addition, the new rule offers guidance on how to evaluate each of the six factors to determine worker classification accurately. This includes considering whether a worker has an opportunity for profit or loss based on their business skills and initiative, the degree of control they have over how they perform their work, and their investment in equipment or materials.
Moreover, the rule emphasizes that no single factor is determinative of whether a worker should be classified as an employee or an independent contractor. It also provides examples to illustrate how each factor should be evaluated in different scenarios.
The effective date is March 11, 2024. This date is significant as it gives employers and independent contractors some time to understand and prepare for the changes that the new rule introduces. It allows them to reassess their relationships and make any necessary adjustments to ensure they comply with the updated definition and resulting obligations under the FLSA.
The distinction between employees and independent contractors determines whether federal wage-and-hour law applies or not. Employees are entitled to workers’ compensation, minimum wage, overtime pay, and other benefits under the FLSA. Independent contractors do not receive these protections but are instead considered self-employed individuals who negotiate their own contracts.
According to numerous experts, the ambiguous regulation, which lacks clarity and specificity, is expected to result in a substantial increase in lawsuits against businesses for misclassification. This uncertainty surrounding the legal framework may ultimately discourage businesses from hiring gig workers, leading to potential disruptions.
In various industries such as construction and transportation, where efficiency and flexibility are crucial, the reliance on independent contractors for their operations is paramount. These sectors heavily depend on the expertise and specialized skills of independent contractors to meet the demands of their projects. The implications of this rule could have far-reaching effects on their workforce dynamics.
WHAT TO DO NEXT
Employers should take the necessary steps to re-evaluate their relationships with independent contractors and ensure they comply with the updated final rule. Additionally, organizations should review and revise their contracts, policies, and procedures accordingly.
This includes identifying any potential risks or areas for improvement and taking proactive measures to mitigate them. Seeking legal advice and staying updated on any developments or changes in the rule will also be beneficial for businesses moving forward.
Additional resources from the DOL are also available. These include:
DOL Fact Sheet 13: Employment Relationship under the FLSA
DOL Employee-facing Publication: Get the Facts on Misclassification under the FLSA—Employee or Independent Contractor?
As always, Kapnick can help. We’re willing to help you identify your risks and provide you with the right resources, tools, or programs to mitigate them.
Overall, the DOL’s new rule aims to provide clarity and consistency in determining worker classification while balancing the needs of both employers and workers. It is essential for businesses to comply with these regulations to avoid potential legal consequences and maintain a fair and ethical work environment for all parties involved.