New Rule Defines Employee vs. Independent Contractor Status under the Fair Labor Standards Act

By Annie Stephan Mar 28, 2024 12:00 AM EDT

The labor market's structure is changing. The Department of Labor (DOL) is at the forefront of this transition, nurturing transparency in employment classifications. A significant step was taken to effect this change on January 10. This date marked the publication of the new Federal Register rule, "Employee or Independent Contractor Classification Under the Fair Labor Standards Act." The fresh stipulation is an aid to employers and workers. It delineates the differences between employees and independent contractors under the FLSA.

New Rule Defines Employee vs. Independent Contractor Status under the Fair Labor Standards Act — (Photo : Getty Images/Fabian Bimmer )

2021 Rule Rescinded for Better Compliance

One pivotal move by the Department of Labor was to rescind the 2021 Independent Contractor Rule. Legal predecessors found discordances in the previous rule that spurred misclassifications of employment status. This reversal seeks to bring the department's guidance in line with judicial precedent. The intended effect is to abate confusion across the board. Hence, the initiative ensures better worker protection and supports genuine compliance from employers.

How Will Classification be Assessed?

Detailed in the final rule is the return to a time-tested approach. The multifactor analysis requires due diligence in the totality of the circumstances when distinguishing a worker's status. The analysis engages different factors in the estimation. There is no set precedence for any factor. Reflections on profit or loss opportunities based on managerial skill, the permanency of a working relationship, and levels of investment by the worker and potential employer are intrinsic to the process. Workers' control, the extent of work as an integral part of the employer's business, and the worker's skill and initiative also serve as analytical parameters.

ALSO READ: Treasury Rolls Out Over $27M in New Funding Support for Small Businesses Across Six States and Territories

Is the Economic Reality Test Still Relevant?

The economic reality test is at the heart of the updated regulations. Its structural adaptability makes it effective in evaluating contemporary job scenarios. The test addresses elements like the chance for profit or loss, the permanency of the working relationship, the level of exerted control, and the work's centrality to the employer's business. This test is a practical instrument, regardless of evolving employment arrangements.

Clarifications on Misclassification

Misclassification has been a substantial hurdle, often resulting in workers forfeiting their rightful wages and benefits. The updated rule is a focal point of the DOL's commitments. The intent is to combat these misclassifications, with a special focus on vulnerable, most susceptible workers.

Employee and Independent Contractor: What are the Consequences of Proper Classification?

The proper demarcation heralds benefits on both sides of the employment spectrum. Employees acknowledged under the FLSA gain access to their deserved wages and protections. Concurrently, it ensures that independent contractors, including freelancers, maintain proper classification. They are affirmed as critical actors within the economy. Their contributions remain highly valuable, and the new rule aims not to impede their economic pursuits.

What's Next for the Workforce?

With the rule set to take effect on March 11, workers and employers are urged to understand the intricacies of these new guidelines. Consensus on the rule's relevance is expressed across the labor sector. Anticipation builds as the enactment date closes in. It is a transition period, promising millions a better-defined and fairer employment relationship.

Words from the Wage and Hour Division's Lead

The head of the DOL's division, Jessica Looman, extends her advice to the workforce. She encourages earnest exploration of the rule and its implications for labor laws. The objective is to foster an environment where worker rights are acknowledged and practiced regularly. Looman oversees the initiative, ensuring it accommodates modern work environments without forgoing the essence of traditional employment protections.