The United States Department of Labor published its Final Rule on January 10, 2024 governing the classification of independent contractors. Taking effect next month, the Final Rule reintroduces standards that are more consistent with judicial precedent.
This new standard is enacted to avoid the misclassification of workers and ensure that workers receive due protections under the law.
KingSpry’s Employment Law Chair, Avery E. Smith, Esq., details what all employers and workers must know about the proposed rule to ensure compliance with the Department’s revised standards.
Overview
On January 10, 2024, the U.S. Department of Labor (the “Department”) published its final rule (the “Rule”), which updates its guidance on the classification of independent contractors under the Fair Labor Standards Act (the “FLSA”).
The Rule rescinds the Department’s 2021 Independent Contractor Rule (the “2021 IC Rule”), and modifies the Wage and Hour Division regulations. According to the Department, the Rule provides an analysis for determining worker status “that is more consistent with the FLSA as interpreted by longstanding judicial precedent.”
Purpose
The misclassification of workers as independent contractors may deny workers minimum wage, overtime pay, and other protections under the law. The Rule intends to reduce these risks and provide a more consistent approach for businesses that engage in projects with independent contractors.
The Rule takes effect on March 11, 2024.
Why is the 2021 IC Rule being Rescinded?
The Department found that the 2021 IC Rule did not fully comply with the FSLA, as interpreted by the courts. In fact, the 2021 IC Rule departed from decades of case law that applied the economic reality test when determining worker status.
Due to inconsistencies with the 2021 IC Rule, employees were misclassified as independent contractors and denied basic work protections, such as the right to minimum wage and overtime pay. Not only did the former rule harm workers, but it placed compliant employers at a competitive disadvantage.
The Department wrote that leaving the former rule in place would have a “confusing and disruptive effect” on both workers and employees. Therefore, the 2021 IC Rule will be rescinded on March 11, 2024.
Resurfacing Previous Standards
The updated standards no longer consider “core factors.” Rather, the Rule returns to a totality of the circumstances analysis, also known as the economic reality test. This test considers economic reality as a whole, as well as the following six (6) factors:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the potential employer;
- Degree of permanence of the work relationship;
- Nature and degree of control;
- Extent to which the work performed is an integral part of the potential employer’s business; and
- Skill and initiative.
The Rule also permits broader discussion of scheduling, remote supervision, price setting, and the ability to work for others as it pertains to factor four (4) above, nature and degree of control.
Who are Independent Contractors?
Independent contractor status refers to workers who, as a matter of economic reality, are not economically dependent on an employer for work. Independent contractors are in business for themselves. They are commonly referred to as “self-employed” or “freelancers.”
A worker is not an independent contractor if they are economically dependent on an employer for work.
Does the Final Rule Change Other Laws?
No. The Rule only revises the Department’s interpretation under the FLSA. All other federal, state, and local laws governing the classification of workers remain as they are.
Key Takeaways for Employers & Workers
The Department’s long-awaited Independent Contractor Rule takes effect on March 11, 2024, and provides employers and workers with a clearer understanding of worker classification under the FLSA.
By restoring the multi-factor analysis, the Department ensures that a wider scope of factors are considered when determining whether a worker is an employee or independent contractor.
