Independent Contractor Rule Goes into Effect

THURSDAY, MARCH 14, 2024


On Monday (March 11), the U.S. Department of Labor’s final rule to help better understand when a worker qualifies as an employee or as an independent contractor under the Fair Labor Standards Act took effect.

The rule was introduced in January, with hopes to help protect workers by making sure they are classified properly and receive wages they’ve earned.

FLSA Background

In 1938, Congress enacted the FLSA to eliminate “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.”

At the time, the FLSA required covered employers to pay nonexempt employees at least the Federal minimum wage for all hours worked and at least one and one-half times the employee's regular rate of pay for every hour worked over 40 in a workweek.

It also required covered employers to maintain certain records and prohibit retaliation against employees who were discharged or discriminated against after.

However, the FLSA wage and overtime protections don’t apply to independent contractors, which refer to those who are not economically dependent on their employer for work and are in business for themselves. Independent contractors are also commonly referred to as those who are self-employed or freelancers.

In January 2021, the DOL published the Independent Contractor Status Under the Fair Labor Standards Act (2021 IC Rule), which was meant to guide the classification of independent contractors under the FLSA. The rule identified five economic reality factors to better guide the inquiry of a worker’s status.

After further investigation, the DOL found that the 2021 IC Rule doesn’t fully comply with the FLSA’s text and purpose as interpreted by the courts.

To better prevent the misclassification of workers so that employees are not wrongfully denied rightful wages and that the economy is not negatively affected, the DOL proposed a new rulemaking in October 2022.

According to the DOL, the proposed rule provides a more consistent, longstanding judicial precedent on which employers have relied to classify workers as employees or independent contractors under the FLSA.

If approved, the Department believes these changes to the FLSA would preserve essential worker rights and provide consistency for regulated entities.

Specifically, the proposed rule would do the following:

  • Align the department’s approach with courts’ FLSA interpretation and the economic reality test;
  • Restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA;
  • Ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors;
  • Revert to the longstanding interpretation of the economic reality factors. These factors include the investment, control and opportunity for profit or loss factors. The integral factor, which considers whether the work is integral to the employer’s business, is also included;
  • Assist with the proper classification of employees and independent contractors under the FLSA; and
  • Rescind the 2021 Independent Contractor Rule.

In June of last year, the proposed rulemaking was extended as the DOL said it was continuing to review and consider the comments received and was considering whether to adopt the proposed rule, adding that “issuance of a final rule should make it unnecessary to pursue this appeal.”

The final rule was published in January of this year. According to the department’s release, the guidance provided by the final rule aligns with longstanding judicial precedent on which employers have previously relied to determine a worker’s status as either an employee or independent contractor.

Additionally, the new rule intends to preserve essential worker rights and provide consistency for entities covered by the FLSA. 

The new “independent contractor” rule reportedly restores the multifactor analysis used by courts for decades, ensuring that all relevant factors are analyzed to determine whether a worker is an employee or an independent contractor.

The DOL explains that the rule addresses six factors that guide the analysis of a worker’s relationship with an employer, including:

  • Any opportunity for profit or loss a worker might have;
  • The financial stake and nature of any resources a worker has invested in the work;
  • The degree of permanence of the work relationship;
  • The degree of control an employer has over the person’s work;
  • Whether the work the person does is essential to the employer’s business; and
  • A factor regarding the worker’s skill and initiative.

The rule separately rescinds the 2021 Independent Contractor Rule that the department believes is not consistent with the law and longstanding judicial precedent. 

What Now

Despite the ruling going into effect this month, several organizations and lawmakers have filed lawsuits and resolutions, respectively, to overturn the rulemaking and return to the previous 2021 Independent Contractor Rule.

The Associated Builders and Contractors and the Financial Services Institute, along with a coalition of business groups, challenged the standard in a Texas district court; however, the final request was not addressed before the rule took effect.

The complaint reportedly challenges the 2024 Independent Contractor Rule, arguing that the rule is arbitrary and capricious under the Administrative Procedure Act and violates the Regulatory Flexibility Act. The coalition also asked the court to declare that the 2021 Independent Contractor Rule remain in effect.

“Independent financial advisors choose to be independent so that they can operate their own businesses and better serve their clients. We remain committed to ensuring our members maintain that choice and have security in their classification status. Our members should not have to risk losing their independent contractor status because, for example, they are complying with federal and state securities rules,” said FSI President and CEO Dale Brown in a statement.

“The 2021 Independent Contractor Rule helped provide much-needed certainty and clarity regarding our financial advisor members’ classification as independent contractors. However, the 2024 Rule renews uncertainty, creating burdens for advisors and firms which ultimately increases costs and limits Main Street Americans’ access to professional financial advice, products and services.”

Additionally, earlier this month, Representative Kevin Kiley (R-California) and Senator Bill Cassidy (R-Louisiana) introduced the Congressional Review resolution to repeal the new independent contractor rule and return to the 2021 rule.

“SHRM stands in firm support of the CRA's initiative to repeal the recently published worker classification rule under the FLSA [Fair Labor Standards Act] and return to the 2021 rule,” said Society for Human Resource Management Chief of Staff and Head of Public Affairs Emily M. Dickens.

“We believe that the current rule fosters ambiguity, deterring businesses from extending essential training to independent workers, a detrimental scenario for both parties involved. The 2021 rule struck a balanced approach, promoting business flexibility while curbing misclassification risks.”

SHRM had also released a statement following the rule’s induction, noting that the “ongoing shifts in regulatory guidance impose compliance burdens and legal uncertainties on HR professionals and business executives.”

   

Tagged categories: Commercial contractors; Contractors; Department of Labor; General contractors; Good Technical Practice; Government; Government contracts; Industrial Contractors; Labor; Laws and litigation; Lawsuits; NA; North America; Painting Contractors; Program/Project Management; Regulations; Residential contractors; Workers

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