Effective March 11, 2024, U.S. entities are to apply revised criteria for determining whether workers are employees or qualify as independent contractors, according to a final Labor Department rule released earlier this year. Should last-minute attempts by business coalitions to derail the rule fail, the use of a six-factor “economic realities” test in the new rule will supersede the previous administration’s 2021 regulation that laid out a different standard to test for independent contractor status under the main U.S. labor law.
The latest rule specifically changes what aspects of an employment experience should be considered in determining if a worker can be exempted from the federal Fair Labor Standards Act (FLSA) coverage that applies to employees, generally reverting to pre-2021 requirements set down years before.
Inconsistency Across Labor and Tax Laws Remain
Importantly, these rules do not apply to how the U.S. Internal Revenue Service determines employment status for tax purposes. Those guidelines are separately laid out and remain unchanged. This rulemaking is limited to coverage issues under the FLSA.
Also note that separate sets of rules, although related, can apply for determining employment status to be eligible for union membership under the Labor Relations Act, as well as for certain benefits, such as retirement benefits under the Employee Retirement Income Security Act. Coverage under these laws can differ from the general standard being re-set under the FLSA.
And states also retain the ability to create their own tests under their laws.
Requirement Retains Tests on Economic Dependence and Control
“This final rule returns to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity,” according to the text of the final rule. The 2021 rule focused primarily on two criteria to help ascertain employment status: the nature and degree of control over the work and the worker's opportunity for profit or loss. Other aspects of work experience were considered less important in making a determination that a worker is, or is not, an employee.
The control over how the work is performed remains a criteria, but now that and the profit and loss factor will not have any greater influence over determining worker status. The other four factors of the six-factor test to be considered as equal to these first two are lined out in the final rules as: investments by the worker and the potential employer; the degree of permanence of the work relationship; the extent to which the work performed is an integral part of the potential employer's business; and skill and initiative.
Considering whether the work performed itself is an integral part of an employer’s business is a new wrinkle on this factor, which had been more focused on how integral the worker’s role was to a business’s operations. Another new consideration relates to work performed that is for the “sole purpose of complying” with laws and regulations, and whether such work is deemed to be more under the control of the entity.
Enforcement, Penalties and Other Liabilities
The primary vehicle for pursuing misclassification claims has been through the U.S. federal and state judicial systems, but audits performed by the Labor Department’s Wage and Hour Division have successfully sought back wages and liquidated damages through settlements with employers, civil penalties through administrative law judges and by halting the transfer of goods and services for employers until compliance is verified.
For the most part, it will be courts that interpret the rule, and judges can choose whether to apply it to circumstances surrounding specific claims.
The FLSA allows the Labor Department or an employee to recover back wages and an equal amount in liquidated damages where minimum wage, overtime and other violations of the FLSA exist. There is a general 2-year statute of limitations applicable for violations that may result in the recovery of back wages and liquidated damages. The statute of limitations for violations can be extended to 3 years if it is determined the violations were willful.
Recognition of Gig Work?
The new rule has no carve-out or separate test to be used for those workers who are considered gig workers. While there is a recognition that certain workers, such as ride-share drivers or those performing services via intermediary organizations, may retain a certain independence of status, the rule makes no specific distinctions in the six-factor test for this type of work.
Next Steps
The rule is being challenged by a bevy of business organizations who legally petitioned across four states to halt, or at least, derail, implementation. As of this writing, however, there has been no order to stay the rule for these legal considerations, or any injunction preventing implementation. U.S. Senator Bill Cassidy (R-Louisiana) announced he would offer a resolution to challenge the rule under the Congressional Review Act.
In the interim, employers should examine current and potential independent contractor arrangements using the latest test to assess compliance with the new rule.
Should President Biden and the Democrats win reelection in 2024, there is a greater likelihood of movement to instil some proposals from the Obama Administration that sought to clarify employers responsible for FLSA requirements in multi-layered employment situations and may even seek to further identify how gig workers could be employees subject to coverage under the law.
Michael Baer is president of Baer Unlimited, an independent research, analysis, and communications provider that helps Payroll modernize operations, stay compliant, and improve the use and security of their data. For more on the issue of worker status, book Michael as a mentor through the GPA Mentor page, or contact him directly at mike.baer@baerunlimited.com.
Effective March 11, 2024, U.S. entities are to apply revised criteria for determining whether workers are employees or qualify as independent contractors, according to a final Labor Department rule released earlier this year. Should last-minute attempts by business coalitions to derail the rule fail, the use of a six-factor “economic realities” test in the new rule will supersede the previous administration’s 2021 regulation that laid out a different standard to test for independent contractor status under the main U.S. labor law.
The latest rule specifically changes what aspects of an employment experience should be considered in determining if a worker can be exempted from the federal Fair Labor Standards Act (FLSA) coverage that applies to employees, generally reverting to pre-2021 requirements set down years before.
Inconsistency Across Labor and Tax Laws Remain
Importantly, these rules do not apply to how the U.S. Internal Revenue Service determines employment status for tax purposes. Those guidelines are separately laid out and remain unchanged. This rulemaking is limited to coverage issues under the FLSA.
Also note that separate sets of rules, although related, can apply for determining employment status to be eligible for union membership under the Labor Relations Act, as well as for certain benefits, such as retirement benefits under the Employee Retirement Income Security Act. Coverage under these laws can differ from the general standard being re-set under the FLSA.
And states also retain the ability to create their own tests under their laws.
Requirement Retains Tests on Economic Dependence and Control
“This final rule returns to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity,” according to the text of the final rule. The 2021 rule focused primarily on two criteria to help ascertain employment status: the nature and degree of control over the work and the worker's opportunity for profit or loss. Other aspects of work experience were considered less important in making a determination that a worker is, or is not, an employee.
The control over how the work is performed remains a criteria, but now that and the profit and loss factor will not have any greater influence over determining worker status. The other four factors of the six-factor test to be considered as equal to these first two are lined out in the final rules as: investments by the worker and the potential employer; the degree of permanence of the work relationship; the extent to which the work performed is an integral part of the potential employer's business; and skill and initiative.
Considering whether the work performed itself is an integral part of an employer’s business is a new wrinkle on this factor, which had been more focused on how integral the worker’s role was to a business’s operations. Another new consideration relates to work performed that is for the “sole purpose of complying” with laws and regulations, and whether such work is deemed to be more under the control of the entity.
Enforcement, Penalties and Other Liabilities
The primary vehicle for pursuing misclassification claims has been through the U.S. federal and state judicial systems, but audits performed by the Labor Department’s Wage and Hour Division have successfully sought back wages and liquidated damages through settlements with employers, civil penalties through administrative law judges and by halting the transfer of goods and services for employers until compliance is verified.
For the most part, it will be courts that interpret the rule, and judges can choose whether to apply it to circumstances surrounding specific claims.
The FLSA allows the Labor Department or an employee to recover back wages and an equal amount in liquidated damages where minimum wage, overtime and other violations of the FLSA exist. There is a general 2-year statute of limitations applicable for violations that may result in the recovery of back wages and liquidated damages. The statute of limitations for violations can be extended to 3 years if it is determined the violations were willful.
Recognition of Gig Work?
The new rule has no carve-out or separate test to be used for those workers who are considered gig workers. While there is a recognition that certain workers, such as ride-share drivers or those performing services via intermediary organizations, may retain a certain independence of status, the rule makes no specific distinctions in the six-factor test for this type of work.
Next Steps
The rule is being challenged by a bevy of business organizations who legally petitioned across four states to halt, or at least, derail, implementation. As of this writing, however, there has been no order to stay the rule for these legal considerations, or any injunction preventing implementation. U.S. Senator Bill Cassidy (R-Louisiana) announced he would offer a resolution to challenge the rule under the Congressional Review Act.
In the interim, employers should examine current and potential independent contractor arrangements using the latest test to assess compliance with the new rule.
Should President Biden and the Democrats win reelection in 2024, there is a greater likelihood of movement to instil some proposals from the Obama Administration that sought to clarify employers responsible for FLSA requirements in multi-layered employment situations and may even seek to further identify how gig workers could be employees subject to coverage under the law.
Michael Baer is president of Baer Unlimited, an independent research, analysis, and communications provider that helps Payroll modernize operations, stay compliant, and improve the use and security of their data. For more on the issue of worker status, book Michael as a mentor through the GPA Mentor page, or contact him directly at mike.baer@baerunlimited.com.