Four steps businesses can take to prepare for Dept. of Labor’s new Independent Contractor Rule

Originally published on magnoliatribune.com

Businesses across Mississippi and the nation should plan to comply with a new rule from the Department of Labor (DOL), set to take effect on March 11, 2024, revising the way in which employers analyze who is an employee and who is an independent contractor under the Fair Labor Standards Act (FLSA).  

Under the FLSA, employees are entitled to certain benefits like minimum wage and overtime pay, but independent contractors are not. Instead of minimum wage, overtime pay, and other benefits, independent contractors generally have more flexibility to set their own schedules and perform their work in the way they deem fit. The DOL’s new rule affirms these roles and instructs employers to use a totality-of-the-circumstances analysis to determine whether a worker is an employee or independent contractor. 

Using the totality-of-the-circumstances analysis, employers are to consider the following six factors when determining how to classify a worker: 

1. The degree to which the employer controls how the work is done.
2. The worker’s opportunity for profit or loss.
3. The amount of skill and initiative required for the work.
4. The degree of permanence of the working relationship.
5. The worker’s investment in equipment or materials required for the task.
6. The extent to which the service rendered is an integral part of the employer’s business.
   
   

Unlike the DOL’s 2021 rule, which placed a considerable weight on two “core factors”—control over the work and opportunity for profit or loss—no single factor carries greater weight under the new rule. The totality-of-the-circumstances analysis takes an economic reality approach to classifying workers and considers the non-exhaustive list of factors above, plus other relevant factors. 

How Employers Should Prepare for the DOL’s New Rule

Although there are currently three lawsuits challenging the DOL’s new rule, any of which could halt its implementation, no decision has been made by any court with regard to the rule. Absent court order enjoining the rule from taking effect, employers should plan to comply with the new rule beginning on March 11, 2024. 

To ensure compliance with the DOL’s new rule, employers should examine their workforce to avoid misclassifying a worker. In so examining, employers should: 

• Review all existing and contemplated independent-contractor agreements.
• Consider each independent contractor’s day-to-day duties.
• Assess each independent contractor’s role in the organization. 
• Consider the compensation structure under which independent contractors are paid.

Following this review, employers must determine whether the independent contractors are properly classified under the FLSA. Determining whether a worker is an employee or an independent contractor is an art, not a science. Although courts, agencies, advocates, and employers have spent decades refining this art, they all struggle.  

In light of the DOL’s new rule, and the lack of binding court precedent applying this rule, employers should seek legal assistance in determining whether its workers are properly classified to avoid any misclassification and penalty under the FLSA. An employer’s misclassification of workers as independent contractors can result in significant penalties under the FLSA, including the requirement to pay a misclassified employee for back overtime pay and liquidated damages. If an employer misclassified workers, then they employer may also be liable for state and federal tax violations, violations of employment eligibility law, and reputation damage.