The Department of Labor (DOL) has recently introduced a new rule that will change how businesses classify their workers under the Fair Labor Standards Act (FLSA).
This rule will help businesses differentiate between employees and independent contractors, ensure that everyone is treated fairly, and create a safe and fair work environment.
In this blog post, we’ll take a closer look at what the new rule means for businesses, how they can make the most of it, and most importantly, how they can avoid any potential issues.
Let’s get started!
Understanding the Fair Labor Standards Act (FLSA)
The FLSA sets standards for minimum wage, overtime pay, record-keeping, and child labor, which apply to employees in various sectors. Complying with these regulations is vital to ensure that your employees receive fair compensation and work in safe conditions.
The Final Rule Overview:
The new rule from the Department of Labor (DOL) emphasizes the importance of using the “economic reality” test to determine whether a worker is classified as an employee or an independent contractor under the Fair Labor Standards Act (FLSA). This test helps ensure that workers receive the appropriate wages, benefits, and protections while also clarifying for businesses that work with independent contractors.
Rather than relying on labels or contracts, the DOL’s new rule focuses on six key factors that can help determine whether a worker is an employee or a contractor. These factors include the opportunity for profit or loss, the nature of control, and other key considerations. By considering these factors, businesses can take a holistic view of their situation and determine how to classify their workers best.
Let’s review each key factor of the “economic reality” test.
Factor One: Opportunity for Profit or Loss Depending on Managerial Skill
The first factor focuses on the level of impact the worker has on their own profits and losses. Can they make less or more money solely based on their decisions? Can they influence their profits or potentially face losses based on their choices and managerial skills?
Some questions businesses can use when determining if a worker is a contractor or an employee based on the first factor:
- Can they negotiate their pay and choose when they work? Employees typically do not negotiate their pay rate; an employment contract or company policy usually predetermines it. However, contractors will always have the opportunity to negotiate their rates and choose when to execute the tasks.
- Do they advertise their services and look for more work? Employees usually work with a specific company and won’t market their services, while contractors often actively market their services, advertise their expertise, and seek new clients.
- Are they responsible for hiring help or buying materials? Employees typically don’t make significant business decisions like hiring other workers, purchasing materials, or renting space for their work. They’re usually provided with an office and any equipment that is required to perform the job. Contractors often decide to hire subcontractors, purchase necessary equipment, and lease workspace.
Overall, If workers don’t have much control over their earnings, they’re more likely to be considered employees.
Factor Two: Investments by the Worker and the Potential Employer
Look at whether the worker invests in tools or equipment needed for the job. If their investments help them run their own business, they’re likely an independent contractor. Consider the following:
- What specific investments has the worker made to enhance their ability to perform tasks or expand their business? If the employer is paying for tools, equipment, and investments to help the worker do their job better, the worker is likely an employee. If workers pay and invest their own money to improve their skills, performance, equipment, and more, they’re likely contractors.
- The worker’s investments should help them expand their work.
Overall, investments made by workers that contribute to the operation of an independent business favor independent contractor status. Conversely, a lack of such investments suggesting dependency on the employer’s resources tends to indicate employee status.
Factor Three: Degree of Permanence of the Work Relationship
Is the work relationship ongoing, continuous, or exclusive to one employer? If the working relationship is open-ended, non-exclusive, project-oriented, or sporadic, with the worker marketing their services to multiple clients, it tends to support an independent contractor classification.
The nature of the work being seasonal or temporary does not automatically classify a worker as an independent contractor. However, if the worker’s inability to secure permanent work is due to inherent operational characteristics specific to certain businesses or industries, they may still be considered an employee unless they actively pursue independent business initiatives.
The two different work relationships are described as follows:
Employee Status:
- An individual employed by a company on a full-time or part-time basis with a regular schedule and duties typically fits the employee status criteria.
Independent Contractor Status:
- A worker who operates independently, takes on projects from various clients, and does not have an exclusive commitment to any single employer is likely an independent contractor.
Factor Four: Nature and Degree of Control
Does the potential employer dictate how work is done and control the economic aspects of the work relationship? Even if the employer doesn’t actively enforce control, it counts as control if they have the right to do so.
Here are vital things to consider about the potential employer’s control:
Setting the Schedule:
Employees usually follow a set schedule made by the employer.
Independent contractors typically set their own schedules.
Supervision:
Employees often have bosses who watch over their work closely.
Independent contractors usually work with less supervision.
Limits on Other Work:
If an employer limits a worker’s ability to work for others, it shows control.
- Independent contractors often work for multiple clients.
Using Technology to Monitor:
- Employers using tech to watch workers may be controlling.
- Contractors have their own equipment and are not usually monitored.
Discipline:
- Employers can discipline workers, even if they rarely do.
- Contractors can have their contract terminated, but they can’t be punished/disciplined with tools like write-ups, warnings, pay cuts, etc.
Control over Pay and Marketing:
- If the employer sets prices or controls how services are advertised, it shows control.
- Contractors usually set their own pricing and advertise their services.
Factor Five: Extent to Which the Work Performed is an Integral Part of the Potential Employer's Business
Is the work a vital part of the potential employer’s business?
If the work done by a worker is crucial, needed, or central to the potential employer’s main business, then the worker is considered an employee.
Factor Six: Skill and Initiative
Does the worker use special skills for the job, and do these skills show business-like initiative?
If the worker doesn’t use special skills or relies on training from the potential employer, they’re likely an employee.
- Just having special skills doesn’t automatically make someone an independent contractor, as both employees and contractors can be skilled.
- The key is if the worker uses their special skills with business-like initiative, which suggests they’re an independent contractor.
The Department of Labor included some examples in their final rule article to help you understand better who would be considered an employee and who would be considered a contractor.
The Difference Between the IRS and the DOL:
Navigating the maze of worker classification can be daunting, especially when two major federal agencies, the Internal Revenue Service (IRS) and the Department of Labor (DOL), have different perspectives. Here’s the lowdown:
IRS Perspective: The IRS follows what’s called the “common law control test.” In simple terms, they’re keen on who calls the shots. If you’re dictating the what, when, and how of your workers’ tasks, the IRS might see them as employees, not contractors.
DOL Perspective: The DOL goes by the “economic reality test.” They’re all about whether your workers are truly independent or reliant on you for their livelihoods. Factors like profit potential and level of control come into play here.
Sometimes, the DOL might view what the IRS sees as an independent contractor as an employee under the Fair Labor Standards Act (FLSA). This discrepancy can spell trouble for business owners, leading to penalties and legal headaches.
If you are confused or unsure where your employees and contractors fall under DOL or the IRS, seek guidance from legal and tax experts to ensure compliance. Keeping detailed records of contracts and job roles can also provide a safety net.
Who to Contact for Help?
For questions about the final rule or worker classification under the FLSA, you can reach out to:
– U.S. Department of Labor (DOL): The Wage and Hour Division’s (WHD) Division of Regulations, Legislation, and Interpretation can be helpful.
– Local WHD District Offices: Find your nearest WHD District Office for assistance with specific worker classification inquiries.
– Contact a Labor Lawyer: Lawyers specializing in employment law or labor law are well-versed in legal frameworks and regulations governing worker classification. They can provide guidance on interpreting FLSA guidelines, assessing your specific business practices, and advising on compliance strategies
Disclaimer:
Please note that the information provided in this blog post is for informational purposes only and should not be considered legal advice. The author of this blog post is not a lawyer or a Certified Public Accountant (CPA), and the content presented here does not constitute legal, financial, or tax advice.
The author has made every effort to ensure the accuracy and reliability of the information provided, but legal and regulatory frameworks can vary by jurisdiction and may change over time. It is recommended that readers consult with qualified legal or tax professionals to obtain personalized advice tailored to their specific circumstances.
The author disclaims any liability for any actions taken or not taken based on the information contained in this blog post. Readers are encouraged to conduct their own research and due diligence or seek professional advice before making decisions related to employment regulations, worker classification, or any other legal matters discussed herein.
