The United States Department of Labor announced a new rule for defining whether a worker is an “employee” or considered an “independent contractor” according to the Fair Labor Standards Act.
Now, let's delve deeper into the implications of this new rule. In the past, misclassifying employees as independent contractors was a rampant issue.
Sometimes, it's just a mix-up or misunderstanding and the employer genuinely misclassified the employee in error. Other times, it might be because the employer purposely decides to not offer benefits or pay someone less. The Department of Labor notes that employee misclassification is “one of the most serious problems facing affected employees, employers and the U.S. economy.”
Given these distinctions, it's important to consider the serious consequences of misclassification. Employees lose out on the pay and benefits they have a right to. Not only that, but businesses risk incurring backpay, substantial fines, tax liabilities, and even potential lawsuits when they incorrectly classify employees as independent contractors.
Set to take effect on March 11, 2024, the new rule stipulates that when determining if a worker is an employee or an independent contractor, you must look at six different factors. These factors are:
1. The Opportunity for Profit or Loss: This looks at whether or not the worker has ability to make or lose money through their work. Independent contractors can earn money depending on their business choices and how well they work. On the other hand, employees usually get a set amount of money and don't make based on business risks.
2. The Nature of Investment in the Work: Contractors often invest in their own tools and resources for the job, whereas employees are usually provided these by their employer.
3. Permanence of Work Relationship: A long-term, stable work relationship suggests employee status, while independent contractors usually engage in temporary or project-based work.
4. Degree of Employer Control: How much control does the employer have on things like schedule, process, and outputs? Employees typically work under close employer supervision and control, whereas contractors have more autonomy over how they complete their work.
5. How Essential the Work is to the Business: Is the work a core function of the business? If so, it's likely being performed by an employee. An independent contractor, on the other hand, typically performs secondary work.
6. Worker’s Skill and Initiative: Independent contractors usually bring specialized skillsets and advanced expertise, and will typically have a great deal of initiative in seeking new responsibilities. Employees tend to follow more direct guidelines and operate within a more narrow scope.
The new rule marks a shift from the recent 2021 Independent Contractor Rule. Many believe the new approach more closely aligns with legal standards that judges have relied on for decades, in contrast to the 2021 rule.
In light of these changes, it's crucial for employers to take action. The recent shift in distinguishing between employee and independent contractor status is made in an effort to improve clarity and fairness in the workforce. As an employer, it’s essential to understand and adhere to these updated guidelines. Failure to do so may result in significant penalties including fines, legal action, and a damaged reputation.
Think about your current workforce. Are there roles that might need to adjust under these new guidelines? Our team of workforce solutions experts is here to help.