January 23rd, 2024
The U.S. Department of Labor (DOL) recently issued its Final Rule, effective March 11, 2024, concerning the classification of workers as employees or independent contractors under the Fair Labor Standards Act (FLSA). This Final Rule marks a significant change in how worker classification will be assessed, replacing the previous 2021 Rule and returning to a “totality-of-the-circumstances” approach in assessing the economic realities of worker relationships.
Key highlights of the Final Rule include:
1. Economic Reality Focus: The Final Rule shifts the emphasis towards evaluating whether a worker is economically dependent on a company for work, as opposed to income, to determine their classification as an employee or an independent contractor.
2. Six Evaluation Factors: The Final Rule outlines six factors for assessing worker classification, with none of these factors being individually decisive:
a. Opportunity for Profit or Loss Depending on Managerial Skill.
b. Investments made by the Worker and the Potential Employer.
c. Degree of Permanence of the Work Relationship.
d. Nature and Degree of Control Exercised.
e. Extent to Which the Work is Integral to the Company’s Business.
f. Level of Skill and Initiative Required.
3. Opportunity for Profit or Loss: It considers factors like a worker’s ability to negotiate pay, choose jobs, engage in marketing, and make decisions related to hiring and investments as indicative of independent contractor status.
4. Investments: The investments made by a worker should be capital or entrepreneurial in nature to support independent contractor status, while costs imposed unilaterally by the company do not count as such investments.
5. Degree of Permanence: The degree of permanence of the work relationship is assessed based on whether the worker is in business for themselves and pursues multiple opportunities.
6. Nature and Degree of Control: It defines direct and indirect control exercised by potential employers. Actions taken solely for legal compliance are not considered control. It clarifies the use of technology for supervision and addresses issues like schedule control and remote supervision.
7. Work’s Integral Role: This factor looks at whether the work performed by the worker is vital for the company’s operation and whether the company could function without such services.
8. Skill and Initiative: It assesses whether specialized skills and business-like initiative are required for the work. Unskilled workers may still qualify as independent contractors.
9. Additional Unspecified Factors: The Final Rule allows for the consideration of other context-specific factors in assessing worker classification.
10. Impact on State Laws: The Final Rule applies solely to the FLSA and does not affect state wage and hour laws, which may have different criteria for classification.
11. Practical Implications: While the Final Rule may be more employee-friendly than the previous 2021 Rule, its impact on worker classification may vary by industry and the specific circumstances of the worker’s role.
12. Legal Challenges: The DOL will use this standard for FLSA enforcement, but the extent to which courts will defer to the new standard is uncertain.
The Final Rule takes effect on March 11, 2024, and its application may lead to changes in how companies classify their workers, particularly those who are “close to the line” between employee and independent contractor status. Companies should consider auditing their current contractor population and be ready for questions from workers regarding their classification status. The practical outcome of this final rule is that it is likely to lead to more workers being classified as employees under the FLSA. The new set of criteria, and the fact that none of them are determinative, gives regulators more leeway in evaluating each employment scenario on a case by case basis.
It’s crucial for employers to understand the implications of this final rule, as workers also cannot voluntarily waive or self-select their status under the FLSA. (An independent contractor agreement, for example, is not a controlling factor on its own.)
It’s also important to note that this final rule specifically addresses employee vs. independent contractor classification under the FLSA and does not impact other tests used in different contexts, such as tax classification, unionization, discrimination, or common law liability. Additionally, it is an “interpretive” rule, providing guidance but not binding regulations.
The ongoing lawsuit related to the 2021 Independent Contractor Rule (initiated during the Trump era, which had two primary factors, and three additional factors, which together made it easier to achieve independent contractor status) is still pending, and industry groups may continue or initiate new legal challenges against this final rule. Therefore, employers should carefully review and assess their classification policies and practices in light of this rule, as the DOL may use it as the new standard for enforcement activities even while legal proceedings play themselves out.
Lastly, the final rule does not provide specific guidance for particular industries or job types, and its effects on various sectors may vary. For detailed analysis on how the rule may impact specific industries, further consultation with your legal counsel is recommended.
DISCLAIMER: THE INFORMATION PROVIDED IN THIS POST MAY CONTAIN LEGAL INFORMATION, BUT DOES NOT CONSTITUTE LEGAL ADVICE. NO RELATIONSHIP, INCLUDING ATTORNEY-CLIENT RELATIONSHIP, HAS BEEN FORMED AS A RESULT OF THIS POST. YOU ARE ADVISED TO SEEK THE ADVICE OF AN ATTORNEY LICENSED IN YOUR STATE IF YOU HAVE ANY QUESTIONS.
© 2024 Heather Pearce Campbell, The Legal Website Warrior®
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