On January 10, 2024, the U.S. Department of Labor introduced a final rule, effective from March 11, 2024, that revises the guidance on determining employee or independent contractor status under the Fair Labor Standards Act (FLSA). This rule supersedes the 2021 Independent Contractor Status Under the Fair Labor Standards Act rule and establishes a new analysis aligned with the FLSA as per longstanding judicial precedent.
The primary objective of this final rule is to mitigate the misclassification of employees as independent contractors, which can result in the denial of minimum wage, overtime pay, and other essential protections for workers. Notably, the decision aims to reduce the risk of such misclassifications, providing businesses with a more consistent approach when engaging with individuals operating as independent entities.
The U.S. Labor Department has a 6 rule test. The 6 items are as follows and neither of them are more or less important and in no particular order:
The opportunity for profit or loss depending on managerial skill;
Investments by the worker and potential employer;
The degree of permanence of the work relationship;
The nature and degree of control over performance of the work and working relationship;
The extent to which the work performed is an integral part of the potential employer’s business; and
The skill and initiative of the worker.
This new rule isn't an "ABC" test of sorts and doesn't apply with how states like California, Massachusetts, and New Jersey use it for classifying independent contractors. It's more about adjusting the Department of Labor's (DOL) guidance on who's an employee and who's a contractor under the Fair Labor Standards Act (FLSA).
Now, the DOL thinks this rule is going to bring clarity and consistency for businesses, but some folks see it differently. There's a potential downside – it might open the floodgates for lawsuits, especially in fields like transportation and logistics. Lawyers could be pushing to turn independent contractors into employees, claiming damages for overtime and pay deductions, even if those workers prefer being contractors.
The big question for the DOL is whether workers are economically dependent on the employer or doing their own thing. But here's the catch – the rule doesn't really have a solid solution for situations where workers choose to be "economically dependent" on one company, like a vendor tied up with a customer. That's likely to throw some uncertainty into the mix for companies relying on legit independent contractor setups.
Also, this rule tilts the scales toward calling someone an employee if their work is vital to the employer's business. Most businesses pay for services that keep the wheels turning. And get this, actions by companies to stay in line with rules, keep things safe, ensure quality, or stick to contracts might now be seen as bossing the worker around. That's a twist from previous court decisions that said those actions were fair game. Plus, just hanging onto control over work, even if you don't use it, is now a big deal, making some businesses rethink their agreements with contractors. It's a whole new ball game.
Additionally, the impact of this ruling extends to the realm of business insurance, specifically affecting general liability and workers' compensation. The revised classification criteria may prompt adjustments in insurance policies as businesses navigate the evolving landscape of employee and independent contractor relationships, ensuring compliance and addressing potential changes in risk profiles.
To read the entire press release, go to the U.S. Department of Labor's website here: https://www.dol.gov/agencies/whd/flsa/misclassification
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