On January 9, 2024, the U.S. Department of Labor (DOL) announced a final rule that will go into effect on March 11, 2024. Representing a revision of the DOL’s previous guidelines on determining who is an employee or independent contractor under the Fair Labor Standards Act (FLSA), this latest regulation effectively revokes the independent contractor rule issued on January 7, 2021, and closely resembles the DOL’s previously proposed rule.
BACKGROUND
According to the Fair Labor Standards ACT (FLSA), employees have the protected right to receive minimum wage, overtime pay, and assorted benefits.
However, independent contractors do not have access to these safeguards and advantages. As per the U.S. Department of Labor (DOL), this latest rule change aims to minimize the risk of employees being wrongly classified as independent contractors.
It also sets out to establish a uniform method for businesses to properly engage with individuals running their solo enterprises.
2021 INDEPENDENT
CONTRACTOR RULE
On January 7, 2021, during the last days of the Trump Administration, the Department of Labor published the 2021 Independent Contractor Rule. This rule reinstated the Economic Realities Test (ERT) as the primary approach for determining whether a worker should be classified as an employee or independent contractor under the FLSA that had been in place prior to the Obama administration.
The 2021 rule placed particular emphasis on two fundamental aspects: the extent of the worker’s control over the job and the potential for the worker to experience profit or loss based on their initiative and/or investment. These factors held greater significance in the proper classification of independent contractors.
THE “NEW” RULE
The final rule effectively repeals the Independent Contractor Rule of 2021 and reverts to the rule that had been put in place by the Obama administration. This rule reinstates the comprehensive, multi-factor analysis responsible for evaluating whether a worker is an employee or independent contractor under the FLSA. Furthermore, it ensures that all factors are considered without giving any particular factors a predetermined weight of importance. These six factors include the opportunity for profit or loss based on managerial skill, investments made by the worker and potential employer, the duration of the working relationship, the level and extent of control, the degree to which the work contributes to the potential employer’s business, and the worker’s skill level and initiative.
In this new light, the final rule could potentially classify a greater number of workers as employees rather than independent contractors. This classification carries significant implications, particularly in the gig economy, as it would extend FLSA protections to a greater number of individuals. The U.S. Department of Labor has issued new guidance to assist employers with understanding and complying with the final rule.
IMPORTANT INFORMATION
- DOLs final rule revokes the 2021 Independent Contractor Rule.
- The final rule reinstates the comprehensive, multi-factor analysis when determining whether a worker is an employee or independent contractor.
- The final rule looks at all six economic realities test factors without assigning any particular factors a predetermined weight of importance.
- The final rule is effective March 11, 2024.
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