The Final Rule for Distinguishing an Employee and an Independent Contractor

On January 10, 2024, the U.S. Department of Labor announced a final rule to classify workers as either employees or independent contractors under the Fair Labor Standards Act (FLSA). The purpose of this final rule is to offer workers’ equal rights and protection by preventing employee misclassification. The final rule will be effective on March 11, 2024. It rescinds the Independent Contractor Status from January 7, 2021, and restores the multifactor analysis that helps to best identify between the two classifications.

The U.S. Department of Labor uses the economic realities test to assess if an employment relationship exists between two parties and, if there is indeed a relationship, determine what kind. The six metrics used are (as explained on the U.S. Department of Labor site):

1.??? Opportunity for profit or loss depending on managerial skill,

2.??? Investments by the worker and the employer,

3.??? Permanence of the work relationship,

4.??? Nature and degree of control,

5.??? Whether the work performed is integral to the employer’s business, and

6.??? Skill and initiative.

Classifying employees and independent contractors has been a political tug-of-war, as every president and his corresponding administration have made contrasting decisions. However, with this final rule, the U.S. Department of Labor intends to act as justly as possible so that employees earn the correct wage as well as any overtime they have accumulated and employers do not infringe any law. They want to impede any employer or employee from being at a disadvantage.

If some of the above-mentioned information causes confusion, consider the following to better understand this final rule:

1)??? Ask: Who depends on who or who controls the business relationship?

If an “independent contractor” only serves one company or organization and suddenly no longer receives an income from that entity and therefore has zero earnings, then he or she is most likely misclassified and should be considered an employee.

2)??? Ask: What service does the independent contractor provide?

If the independent contractor fulfills a main task for a company or organization, this could be a red flag. The question would then be: Why would an employer allow an independent contractor to dictate his or her terms and conditions to carry out a key part of the business? Is the employer trying to avoid having to pay vacation time, sick time, social security, etc.?

Ideally, and lastly, a proper worker classification should be done by the human resources department and the company’s administration to avert any legal and monetary dilemma.

Remember, each case is very particular and should be analyzed individually so that every decision regarding classification is made fairly.