The Department of Labor has announced a new final rule addressing worker classification under the Fair Labor Standards Act (FLSA).

What is the difference between employees and independent contractors?

The primary differences, at least on paper, between these two worker classifications is that an employee is on a company’s payroll and receives wages and benefits while an independent contractor determines his/her own schedule and does not receive benefits like paid time off or health insurance.

The IRS and the Department of Labor continues to crack down on organizations that incorrectly classify workers as independent contractors rather than employees. By incorrectly classifying employees as independent contractors, organizations are able to reduce direct labor costs and they aren’t paying certain state and federal taxes.

Historically, the tests have been to consider the amount of control your business has on the engagement, compared to the service providers level of independence. This generally determines whether an individual is an employee or independent contractor.

Example:

Who controls:

• When the work is done (days of the week etc.)?
• Daily start and stop times?
• How the work is done?
• Where the work is done?
• Who determines the process used?
• Who owns the equipment used?
• Level of interaction with company employees?
  • Does the worker have to follow an employee’s instructions when completing a project? If that’s the case, the worker should likely be classified as an employee.

What are the new regulations?

The Department of Labor’s Wage and Hour Division has issued final regulations for determining whether a worker should be classified as an employee or an independent contractor. The new rule is titled “Employee or Independent Contractor Classification Under the Fair Labor Standards Act” and repeals the contractor test implemented in 2021 and replaces it with the previous six-factor economic realities test.

The six factors are:

1. Opportunity for profit or loss based on managerial skill. Would the worker earn profits or suffer losses through their own independent effort and decision making? If so, they are likely an independent contractor. This includes negotiating pay, accepting/declining work, etc.
2. Investments by the worker and the potential employer. Does the worker make investments to their own business that are capital or entrepreneurial in nature? If so, they are likely an independent contractor.
3. Degree of permanence of the relationship. The worker is likely an employee if his/her relationship with the organization is permanent or for an indefinite amount of time.
4. Nature and degree of control. How much control does the hiring party have over work performance? This includes hiring, firing, scheduling, pay rates, etc. If the hiring party has control over these areas, the worker would likely be considered an employee.
5. Extent to which the work performed is an integral part of the potential employer’s business. The worker is likely an employee if their role is a fundamental element of the business.
6. Skill and initiative. Does the worker use their own specialized skills in connection with business initiatives for their own business and not that of the hiring party? If so, they are likely an independent contractor.

What it ultimately comes down to is whether the worker is economically dependent on the employer for work or is in business for themself.

When do the final regulations take effect?

They take effect on March 11, 2024.

Need help determining if you workers are classified correctly? Contact us.