This blog focuses on the recent change with the independent contractor status. This is critical information for employers to understand because misclassification carries the risk of a hefty price tag.
The Department of Labor (DOL) implemented a final rule (rule or final rule) for the analysis of independent contractor (IC) status, effective March 11, 2024. The rule marks a return to the “economic realities” test previously utilized by the DOL during the Obama Administration. The rule revises the DOL’s guidance on how to analyze the employee versus contractor classification under the Fair Labor Standards Act (FLSA). The rule rescinds the IC prior rule published in January of 2021.
The IC versus employee designation is controversial and is often a topic of heated political debate. According to the DOL, this is a priority topic because misclassification of employees as contractors denies workers minimum wage, overtime pay, and other legal protections. The DOL has asserted the final rule will “reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.”
To analyze if a worker is an employee or independent contractor, the final rule provides six factors that organizations should consider when analyzing the economic realities of the working relationship. This six-factor test does not concentrate on any particular factor and instead focuses on an individual’s activity as a whole to determine IC status. This “totality-of-the-circumstances” approach includes the following:
No one factor is dispositive. Rather, all the circumstances of the relationship should be examined. The DOL has outlined that the weight given to each factor may depend on the facts and circumstances and additional factors may be relevant if they in some way indicate if the worker is in business for themself as opposed to being economically dependent on the employer for work.
The bottom line for employers is that individuals currently treated as independent contractors may need to be reclassified as employees.
What adds confusion for employers is that the final rule applies only to the FLSA. That means Federal and State agencies may have a different classification. For example, the Internal Revenue Service (IRS) also has guidelines governing the distinction between employees and independent contractors. So an individual properly classified as an independent contractor for tax purposes may be an employee for FLSA purposes. State agencies like unemployment may also utilize their own version of the employee versus independent contractor analysis.
If your organization utilizes independent contractors, it is critical to pull together a list of your ICs and closely review classification under the final rule. Closely evaluate the six-factor test with a “totality-of-the-circumstances” approach and be prepared to implement decision making on what to do with a worker that no longer fits under the IC umbrella for the FLSA. As mentioned above, the consequences of misclassification may include a hefty price tag for your organization in back pay, penalties, liquidated damages, and attorneys’ fees.
Critics assert the final rule has a negative impact on workers because it stymies flexibility to earn income within the microbusiness and gig economy. Legal challenges to the final rule are in the mix and on March 21st, a House of Representatives committee passed a Congressional Review Act (CRA) resolution to nullify the final rule. The CRA is in the early stages and would need to pass both the House and Senate before being sent to the White House.
This is a brief synopsis of complicated and hotly contested regulations. Stay tuned for updates and consult with a trusted advisor to fully understand how the final rule impacts your organization.
Human Resources thought leader, Stacy Johnston, provides innovative solutions with a mission to support organizations in understanding and engaging their biggest competitive advantage… their employees. Johnston is a licensed attorney and holds the SHRM-CP credentials.
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