Final Rule: Employee vs. Independent Contractor – Employee Rights/ Labour Relations

On March 11, 2024, the Department
of Labor’s (“DOL”) final rule (“Final
Rule”) took effect, which rescinded the 2021 Independent
Contractor Rule (the “Prior Rule”) under the Fair Labor
Standards Act (“FLSA”).

The distinction between employee and independent contractor is
significant. The most commonly recognized difference is the
requirement for overtime compensation under the FLSA. A business
must pay a non-exempt employee overtime wages equal to 1.5 times
the employee’s normal hourly rate of pay for any hours worked
in excess of 40 in a work week. That overtime requirement does not
apply to a worker who is an independent contractor. There are other
differences as well, like withholding and payroll taxes as well as
minimum wage requirements that apply to employees but not to
independent contractors.

Prior to any formal guidance from the DOL, courts had various
standards when evaluating the relationship between business and
worker. This disjointed approach led to different outcomes across
courts, even when fact patterns were similar.

Prior Rule

In 2021, the DOL sought to create a more consistent standard and
guidance on worker classification. This Prior Rule consisted of
five factors to determine whether an individual is an employee or
an independent contractor:

• The nature and degree of the individual’s control
  over the work;




• The individual’s opportunity for profit or
  loss;




• The amount of skill required for the
  work;




• The degree of permanence of the working relationship;
  and




• Whether the work is part of an integrated unit of
  production.

Courts generally placed more emphasis on the first two of these
factors: “the nature and degree of the individual’s
control over the work” and “the individual’s
opportunity for profit or loss.”

Final Rule

The Final Rule rescinds the Prior Rule and provides a new
framework for the employee versus independent contractor analysis.
The EEOC states that the Final Rule is more consistent with long
standing judicial precedent and will reduce the risk that employees
are misclassified.

The Final Rule uses a “totality-of-the-circumstances”
analysis, with no one factor getting more weight than another. The
six factors in the new rule are:

• The worker’s opportunity for profit or loss depending on
  managerial skill;




• The relative amount of investment made by the worker in
  comparison to investments made by the potential employer;




• The permanency of the worker’s relationship with the
  potential employer;




• The nature and degree of the potential employer’s
  control;




• The extent to which the work performed is an integral part of
  the potential employer’s business; and




• Whether the worker uses specialized skills indicative of
  business-like initiative.

The DOL also states that economic dependence is the ultimate
inquiry for determining whether a worker is an independent
contractor or an employee. Thus, the Final Rule permits
consideration of additional factors if they are relevant to the
question of economic dependence.

The DOL has published FAQs about the Final Rule.

Employer Impact

According to the DOL, the Final Rule is intended to “reduce
the risk that employees are misclassified as independent
contractors while providing a consistent approach for businesses
that engage with individuals who are in business for
themselves.” However, the “totality of the
circumstances” and “economic dependence” inquiries
under the new Final Rule may give employers less clarity and may
invite a return to the sort of inconsistent outcomes that preceded
the adoption of the Prior Rule. It also is important to note that
the Final Rule applies only to the FLSA. Many states have their own
tests that apply to employee classification and wage and hour
claims. Those state tests remain in effect.

Misclassifying employees can create financial risk for employers
and disrupt the workplace. Employers may face fines, investigations
by the DOL, and collective action litigation. The potential costs
of litigation can be great, including back pay awards, increased
awards for willful misclassification, and attorneys’ fees.

Businesses should take proactive steps to reduce the risk of
misclassification by reviewing whether their existing independent
contractors meet the Final Rule criteria and making the appropriate
changes to comply. The employment law attorneys at Thomson Burton
can help any business navigate the intricacies of the Final
Rule.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.