As the independent workforce continues to grow, so do the issues of worker compliance and misclassification. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics. Each month, we’ll bring you the latest news stories from around the web.
U.S. Department of Labor Announces New Worker Classification Rule Under the Fair Labor Standards Act (FLSA)
On January 9, 2024, the United States Department of Labor (DOL) announced the new independent contractor rule that will guide the DOL in determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The new independent contractor rule (the “2024 Rule”) identifies six factors to be considered and says a classification depends on the totality of the circumstances. The 2024 Rule replaces a rule that was promulgated in 2021 (the “2021 Rule”) which focused on two core factors and three additional factors to determine the classification of a worker.
Both rules provide guidance for determining if a worker is an employee or independent contractor, but neither rule offers a fixed rule. Unlike other rules relating to the FLSA (for example, minimum wage or overtime) both these independent contractor “rules” set forth factors to be considered in making a classification.
Wide Range of Responses to the Announcement of the 2024 Rule
The responses to the DOL’s announcement have ranged from the new rule is a war on freelancers to, it could help workers recover lost wages or not much change.
Response from gig companies
By and large, gig companies didn’t particularly like the new rule, but also don’t expect it to materially change their businesses or require them to reclassify workers. Uber, Lyft, and DoorDash issued statements saying that they do not anticipate making any big changes based on the new rule.
Response from legal observers
Since the announcement, there has been a range of responses from the legal community:
As with most things, there is an element of truth in each of the responses–the new rule is more guidance than a rule and courts are not required to follow it. So, it may not have a meaningful impact from a legal standpoint. In borderline cases, it is probably more likely that a questionable classification will be found to be an employee. But at the same time, it returns to what had been in place for 70 years before the 2021 independent contractor rule.
What are the Similarities and Differences Between the 2021 Rule and 2024 Rule?
The 2021 Rule and 2024 Rule have distinct similarities: they both agree that individuals are independent contractors if they are in business for themselves and that they test is economic dependence. They both recognize that no one factor is dispositive, and the list of factors is not exhaustive. Both rules acknowledge that control is a factor and that whether workers can set their own schedules or can work for other companies are key elements in determining if they are employees or independent contractors.
Both rules provide guidance involving the weighing of factors as opposed to a fixed rule. Both rules may provide guidance for courts, but courts are not required to adopt either rule’s interpretation of the FLSA or economic realities test. Both rules use the economic realities test in contrast with the common law test (used by the IRS) or the ABC test (used by states including California and Massachusetts).
However, the rules are not identical and the 2021 Rule emphasizes two factors while the 2024 Rules adopts a totality of the circumstances approach. If one highlights the differences, one can argue that the 2024 Rule is more likely to result in workers being classified as employees. However, the number of similarities between the two rules suggests that the number of cases in which the differences in the rules make a meaningful difference may be small. The best advice is to carefully evaluate workers to determine if they are employees or independent contractors and if you are not sure, err on the side of caution and classify them as employees.
For more information, check out our resources page on misclassification and compliance. If you have any questions about engagement, classification, or management of your independent workforce, we’re always here to help.