The US Department of Labor (DOL) enacted a new Independent Contractor Rule on January 9, 2024, which refers to the Fair Labor Standards Act (FLSA or Act). The FLSA was introduced to eliminate “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health efficiency, and general well- being of workers.” The new Rule is supposed to determine whether a worker is an employee or an independent contractor. It goes into effect on March 11, 2024.
Why is it important to distinguish between the term’s “employee” and “independent contractor”?
Even if an independent contractor and an employee may be paid for the same or similar work, there are major legal differences between both. For the employee, the company withholds income tax, Social Security, and Medicare from wages paid. For the independent contractor, the company does not withhold taxes. Employment and labor laws also do not apply to independent contractors. Due to that many companies call their workers independent contractors even though they should be, according to their work, categorized as employees. The new Contractor rule is supposed to minimize these wrongful categorizations to guarantee better working conditions.
How to determine whether a worker is an employee or an independent contractor
To determine whether a worker is an employee or independent worker, the definitions must be clarified. The FLSA did not define the term “independent contractor”, but it defines the term “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” “Employee” is defined as “any individual employed by an employer,” and “employ” means “to suffer or permit to work.” These definitions should help to determine whether an employment relationship exists under the FLSA.
As used in the new rule, the term “independent contractor” refers to workers who, as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves.
In addition to being aware of the definitions of the terms, the new rule distinguishes between employees and independent workers with the help of a six-factor system which is supposed to reflect economic reality.
Six economic reality factors to guide the inquiry into a worker’s status as an employee
According to the DOL’s new rule, the following factors determine whether a worker should be considered an employee or an independent contractor:
- Nature and degree of control over the work. The more control an employer has over the worker, the more likely the worker is an employee.
- The workers’ opportunity for profit or loss. The less exposure that the worker has to loss, or the less opportunity a worker has to participate in the profits of a business (either the employer or the worker’s own), the more likely the worker is an employee.
- The amount of skill required for the work. The less skill that is required to do a worker’s work, the more likely the worker is an employee.
- The degree of permanence of the working relationship between the worker and the employer. The more permanently the worker is tied to a single employer, as opposed to moving between multiple employers, the more likely the worker is an employee.
- Whether the work is part of an integrated unit of production. The more integrated the worker is into the employer’s production, the more likely the worker is an employee.
- Whether the worker is making similar types of investments. If the worker is not making an investment in the business that is similar to other investors, the more likely the worker is an employee.
Differences between the new 2024 rule and the 2021 rule
The 2021 rule differed between “core factors” and “less probative factors”, whereas the 2024 final rule points out, that none of the factors is more important than the other. The 2024 rule requires an all- embracing point of view of all circumstances that are important regarding to the difference between an employee and an independent worker.
Because we’re attorneys: Disclaimer. Posted March 4, 2024.
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