DOL Issues Independent Contractor Classification Final Rule

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The U.S. Department of Labor (DOL) has issued some important news for human resources professionals. On January 9, 2024, they released a final rule that revises how to classify workers as employees or independent contractors under the Fair Labor Standards Act (FLSA). This final rule went into effect on March 11, 2024, and replaces the 2021 rule on independent contractor status.

What's at Stake?

The big difference? Worker classification. Employees are entitled to minimum wage, overtime pay, and other benefits. Independent contractors are not. This final rule aims to ensure workers are not misclassified by providing a more comprehensive approach for businesses to determine if a worker is correctly categorized.  It aims to protect employees’ rights while providing businesses with a clear approach to engaging legitimate independent contractors.

A Shift from 2021

The 2021 rule focused on the "economic realities test" (ERT) with two key factors:  the nature and degree of the worker’s control over the work and the worker’s opportunity for profit and loss based on initiative and/or investment.  The final rule rescinds this, returning to a pre-2021 rule precedent.

The New Standard: A Multi-Factor Approach

The final rule implements a "totality-of-the-circumstances" analysis, considering all six ERT factors equally:

  • Opportunity for Profit or Loss: Does the worker's income depend on their managerial skills?
  • Investments by the worker and the employer.
  • Permanence: Is the working relationship ongoing or temporary?
  • Control: The nature and degree of control.
  • Integration: Is the worker's work essential to the company's business?
  • Skill and Initiative: The extent to which the work performed is an integral part of the potential employer’s business, and the worker’s skill and initiative.

Potential Impact: More Employees, More Protections?

This shift may lead to more workers being classified as employees rather than independent contractors, particularly in the gig economy. This translates to them receiving FLSA protections and benefits.

The Takeaway: Stay Informed

The DOL has released guidance to help businesses comply with the final rule. Human resources professionals should familiarize themselves with these resources to ensure proper worker classification moving forward.

It is also important to remember that in addition to the DOL, other agencies like the Internal Revenue Service (IRS), National Labor Relations Board (NLRB), and state-level Departments of Labor and Unemployment agencies have their own independent contractor tests. The FLSA does not preempt any other laws that protect workers, so organizations must comply with all applicable federal, state, and local laws, whichever provides workers with the greatest protection.