A rule intended to prevent worker exploitation is likely to have far-reaching—and possibly unintended—consequences.
On January 9, 2024, The Department of Labor (DOL) published its final rule on how to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). Although it’s meant to protect worker rights, some independent contractors fear it will do more harm than good. Businesses, too, especially those that rely on contract workers, are concerned about its potential impact.
Most American workers fall into one of two broad categories: They’re either traditional employees or independent contractors. Independent contractors include ride-share drivers, freelance journalists, owner-operator truckers, court stenographers, and many others.
Under the FSLA, traditional employees are entitled to employment-based protections, such as minimum wage and overtime pay, retaliation protections, and in some cases, benefits such as health care. Independent contractors are not entitled to these, but they generally have more flexibility over their schedules and which clients they work with.
Many workers prefer their status as independent contractors and choose to operate in that capacity. In some cases, however, companies deliberately misclassify workers as independent contractors, denying them basic protections and benefits and failing to keep necessary records or pay appropriate taxes.
Prior to 2021, the Department of Labor (DOL) did not regulate the definition of “independent contractor.” In 2021, however, it published a rule designed to help employers and workers better understand when a worker qualifies as an employee. The rule consisted of a five-factor test: The two primary factors were the nature and degree of control over the work and the worker’s opportunity for profit or loss. The other three factors were the level of skill required to do the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work was part of an integrated unit of production.
In October 2022, the Labor Department released a new proposed rule, which rests on an “economic realities test” to determine if a worker is economically dependent on an employer for work and therefore an employee or is instead in business for themselves and therefore an independent contractor.
The economic realities test consists of six factors. No single factor is weighted more heavily than any other and additional factors may also be considered. The six factors are:
1. The worker’s opportunity for profit or loss depending on managerial skill
If a worker is unable to meaningfully negotiate their rates, decline or accept work, and make business decisions regarding marketing, this suggests they should be considered an employee.
2. The relative amount of investment made by the worker in comparison to investments made by the potential employer
If a potential employer is supplying a worker with tools and equipment and covering other expenses, this suggests they should be considered an employee.
3. The permanency of the worker’s relationship with the potential employer
Work that is provided on a sporadic basis or with a fixed ending date suggests a worker is an independent contractor.
4. The nature and degree of the potential employer’s control
If a worker works with little or no supervision, can set their own schedule, and has the option to work for multiple businesses, this suggests they are an independent contractor. However, if the employer has the ability to control their schedule, limit their work opportunities, or closely supervise their work, they may be considered an employee.
5. The extent to which the work performed is an integral part of the potential employer’s business
If the worker provides work that is not critical, necessary, or central to the potential employer’s principal business, this suggests they are an independent contractor status.
6. Whether the worker uses specialized skills indicative of business-like initiative
If a worker uses specialized skills together with business planning and effort to support or grow their own business, this suggests they are an independent contractor.
On January 9, 2024, the DOL released this final rule. Barring intervening action by a court, the new rule will take effect on March 11, 2024.
Opposition to the New Rule
Both independent contractors and businesses have criticized the new rule, and legal backlash began as soon as it was published. A group of freelance writers and editors (Warren, et al. v. U.S. Department of Labor, et al.) promptly sued the DOL, arguing that “the new rule is so vague and confusing, it could harm — if not destroy — [their] chosen careers.” Factor #5, for example, could feasibly be construed as meaning that independent nurses who work in hospitals or freelance journalists who write articles for magazines should be considered employees.
Another lawsuit, Coalition for Workforce Innovation, et al. v. Walsh, et al., was originally filed in March 2021 and later stayed pending the DOL’s appeal to the U.S. Court of Appeals for the Fifth Circuit. The Coalition has asked that the stay be lifted so it can revive the challenge.
Associated Builders and Contractors (ABC), which had previously supported the 2021 rule, strongly criticized the new rule, saying it will “result in more confusion and expensive, time-consuming, unnecessary, and often frivolous litigation, as both employers and workers will not understand who qualifies as an independent contractor.”
Ramifications for Employers
Given that one in five Americans is a contract worker of some kind, the new rule is likely to have far-reaching effects. It is probable that more workers will be classified as employees, creating the potential that some businesses will face liability for not providing appropriate benefits to workers they have been treating as independent contractors.
To avoid legal and civil penalties, businesses should carefully review their records and contracts to ensure that workers are correctly classified. Depending on the size of the business, they may need to offer health insurance, sick leave, and other benefits. They should also consider training their management on the differences between employees and contractors, updating their policies and practices as laws change, and seeking legal advice to ensure that they are in compliance.
The industries most likely to employ contract workers—and therefore most likely to be affected— are computer and IT, administrative, accounting and finance, customer service, software development, medical and health, project management, research analysis, writing, and education and training.
It remains to be seen if the new rule will survive court challenges. In the meantime, businesses should take the opportunity to review their current employment practices to ensure their workers are properly classified.
How Tonneson Can Help
As the DOL’s new worker classification rule unfolds, navigating these changes requires a strategic approach. At Tonneson + Co, we understand the intricacies of evolving labor regulations and can guide you through compliance challenges. Our team offers tailored solutions for businesses in various industries, ensuring proper worker classification and minimizing legal risks. Stay ahead of the curve with Tonneson’s expertise. Contact us today to fortify your workforce strategy and thrive in the midst of regulatory shifts.
If you’re interested in working with Tonneson + Co, please reach out to us. We look forward to hearing from you!
"*" indicates required fields