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The New Rule for Independent Contractors: What Employers Need to Know

The Biden administration officially revoked a rule in January that made it easier to classify workers as independent contractors under federal wage and hour laws. Here are five things employers need to know about the new rule that will take effect on March 11, 2024:

Focus on the Totality of the Circumstances

The new rule takes a comprehensive approach, considering all relevant circumstances to distinguish between employees and independent contractors. It leans towards an employee-centric interpretation, which is likely to classify more workers as employees. Previously, the economic realities test focused on five factors, emphasizing worker control over the work and their potential for profit or loss. This previous method also prioritized actual working practices over theoretical arrangements. The change adds complexity for companies that utilize contractors.

New Central Factors

The new rule eliminates the use of these factors and returns to a “totality of the circumstances” analysis. According to the rule, “factors are not given predetermined weight and are considered in light of the economic reality of the entire activity.” The six factors established in the new rule are:

– The worker’s opportunity for profit or loss based on their managerial skills.
– The relative investment made by the worker compared to the potential employer’s investments.
– The permanence of the worker’s relationship with the potential employer.
– The nature and degree of control exercised by the potential employer.
– The extent to which the work performed is an integral part of the potential employer’s business.
– Whether the worker utilizes specialized skills indicative of entrepreneurial initiative.

Additionally, the new rule states that “additional factors may also be considered if relevant to the overarching question of economic dependence.”

Increased Liability Concerns

Under federal wage and hour law, employees are entitled to certain benefits such as minimum wage and overtime pay. But most companies do not provide these benefits to independent contractors. These forms of compensation may not always align with how contractors carry out their work compared to typical employees, and the law does not require companies to provide them.

Once this new rule takes effect, the risk of misclassification will increase, meaning more companies may face potential liabilities for not providing these benefits to their workers. The ramifications can be significant: class-action lawsuits, large settlement demands, retroactive payments, liquidated damages, interest, fines, and attorney fees can quickly accumulate.

Next Steps

Companies that rely on independent contractors face substantial risk of their classification being challenged by the Department of Labor or in private litigation and must take proactive measures to mitigate the risk of misclassification. Compliance is not just a requirement; it is a strategic advantage. Take decisive action now to strengthen your organization’s position and ensure smoother operations:

– Conduct Audits: Companies that are part of the gig economy or have freelancers or independent contractors should conduct internal audits to assess their level of misclassification risk.
– Determine Necessary Classification Changes: Since the new rule will make it more challenging to classify workers as independent contractors, some existing contractors may no longer meet the criteria, and changes will need to be made to ensure compliance.
– Update Policies and Procedures: Review your workforce planning model, as well as your protocols for agreements with gig workers and other independent contractors, to determine if updates are needed in accordance with the final Department of Labor rule.
– Train Managers: Seize the opportunity to ensure that managers understand best practices for navigating relationships with independent contractors.
– Work with Legal Counsel: Classification issues are complex, and mistakes can have significant consequences with substantial costs for companies. Therefore, it is a good idea to work with experienced legal counsel before the new rule takes effect to assess your programs and minimize your risks.

The new rule for independent contractors represents a fundamental shift, demanding careful attention and adaptation from companies. Acceptance and compliance are the only paths forward.

Frequently Asked Questions about the New Rule for Independent Contractors:

1. What does the new rule entail?
The new rule adopts a comprehensive approach to distinguish between employees and independent contractors, considering all relevant circumstances. It leans towards an employee-centric interpretation, which is likely to classify more workers as employees. The rule will take effect on March 11, 2024.

2. What factors are considered in the new rule?
The new rule establishes six factors:
– The worker’s opportunity for profit or loss based on their managerial skills.
– The relative investment made by the worker compared to the potential employer’s investments.
– The permanence of the worker’s relationship with the potential employer.
– The nature and degree of control exercised by the potential employer.
– The extent to which the work performed is an integral part of the potential employer’s business.
– Whether the worker utilizes specialized skills indicative of entrepreneurial initiative.

3. What liability concerns are related to the new rule?
Once the new rule takes effect, the risk of misclassification will increase, meaning more companies may face liabilities for not providing benefits such as minimum wage and overtime pay to their contractor workers. The legal ramifications can be significant, including class-action lawsuits, large settlement demands, and retroactive payments.

4. What steps are recommended for companies using independent contractors?
– Conduct internal audits to assess the risk of misclassification.
– Determine necessary classification changes to comply with the new rule.
– Update policies and procedures related to independent contractors.
– Train managers on best practices for navigating relationships with independent contractors.
– Work with experienced legal counsel, as classification issues are complex and mistakes can have significant consequences for companies.