UncategorizedApril 2, 20240

2024 Independent Contractor Law Changes – Exploring the Mosaic Puzzle of Employee Classifications

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In its latest revisions, the Department of Labor (DOL) unveiled a significant update regarding the classification of workers under the Fair Labor Standards Act (FLSA). This announcement introduces a six-factor test aimed at distinguishing between employees and independent contractors, effective March 11, 2024. This final rule marks a departure from the previously proposed 2021 rule.

Why does this rule matter?  The classification of workers as either employees or independent contractors holds considerable importance, as it determines the applicability of protections under the FLSA. Unlike employees, independent contractors do not benefit from certain legal safeguards, and misclassification can potentially expose employers to substantial liability.

What changes have been made under this final rule?  Prior to 2021, the DOL provided informal guidelines on classifying independent contractors, focusing primarily on the specific relationship between workers and employers. In 2020, the DOL sought to refine this framework by proposing a new five-factor test, emphasizing aspects such as the employer’s control over the work and the worker’s ability to profit or incur losses. Despite finalizing this rule in January 2021, its implementation was delayed due to administrative changes, and it has since been the subject of ongoing legal disputes. In response, the DOL has now introduced a new final rule, rescinding the 2021 version.

Under the new final rule, a six-factor test has been adopted to assess whether a worker qualifies as an independent contractor. This test closely resembles guidance issued and established case law predating 2021:

  1. Opportunity for profit or loss depending on managerial skill;
  2. Investments by the worker and the potential employer;
  3. Degree of permanence of the work relationship;
  4. Nature and degree of control;
  5. Extent to which the work performed is an integral part of the potential employer’s business; and
  6. Skill and initiative.

How will these factors be applied?  The new rule provides guidance for evaluating each factor to determine a worker’s classification as an independent contractor. For instance, employers should assess factors such as the worker’s ability to negotiate pay, investments made in tools or equipment, the duration and exclusivity of the work relationship, the extent of control exerted by the employer, the importance of the work to the employer’s business, and the worker’s level of skill and initiative. Importantly, no single factor holds determinative weight, and a holistic assessment of the circumstances is necessary.

Is the new rule equivalent to the “ABC Test”?  No, while some states utilize the “ABC Test” to determine whether a worker is an independent contractor or an employee, the ABC criteria provided a worker could be lawfully classified as an independent contractor only if ALL three of these criteria are satisfied:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; AND
  2. The worker performs work that is outside the usual course of the hiring entity’s business; AND
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Notably, the new DOL six-factor test discussed above differs from the ABC test. The DOL specifically declined to adopt this three-factor test and opted to rely upon the long-standing multifactor “economic reality” test used by courts to determine whether a worker is an employee or independent contractor. This test relies on the totality of the circumstances where no one factor is determinative.

That being said, the DOL also specified that the new final rule “only revises the Department’s interpretation under the FLSA.” The final rule has “no effect on other laws—federal, state, or local—that use different standards for employee classification,” including states such as California, Illinois, Massachusetts, New Hampshire, or New Jersey, which use the ABC Test. Because “[t]he FLSA does not preempt any other laws that protect workers, so businesses must comply with all federal, state, and local laws that apply and ensure that they are meeting whichever standard provides workers with the greatest protection.”

What’s the next step?  Despite ongoing legal uncertainties, employers should review the new rule and evaluate their independent contractor arrangements in light of the provided framework. Conducting a worker classification audit using the six-factor test can help ensure compliance and mitigate potential risks. Employers should be mindful of their obligation to overcome the presumption of employee status and navigate applicable state and local regulations.

Companies reliant on independent contractors should consider conducting a worker classification audit using the framework provided in this new six-factor test. When reviewing and analyzing their independent contractor relationships, employers should remember that the law presumes every worker is an employee and the employer has the burden of overcoming that presumption for lawful classification of a worker as an independent contractor.

In conclusion, while the implementation of the new rule may introduce complexities, adherence to its guidelines can promote clarity and fairness in worker classification, The People Perspective is available to assist in ensuring regulatory compliance by conducting an audit of your current classifications. Please feel free to contact us for further assistance.

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