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A “New” Rule in Determining Independent Contractor Status – Keep Your Organization in Compliance

By May 30, 2024June 5th, 2024No Comments

As of April 30, 2024, the U.S. Department of Labor (DOL) has been very busy lately, particularly with the introduction of a significant new rule. This rule, announced in April 2024, is aimed at clarifying the classification of workers as employees or independent contractors under the Fair Labor Standards Act (FLSA). It’s crucial for employers and HR professionals to understand this rule as it provides clearer guidelines regarding employment status determination.

This new rule rescinds the 2021 Independent Contractor Rule, which the DOL viewed as inconsistent with existing law and judicial precedent. This move aims to eliminate ambiguity and ensure adherence to established legal standards in determining worker classification.

Acting Secretary of Labor Julie Su emphasized the importance of combating the misclassification of employees as independent contractors, noting that it deprives workers of fundamental rights and protections. Su highlighted the rule’s role in safeguarding workers, particularly those vulnerable to exploitation, by ensuring accurate classification and fair compensation.

The final rule aligns its guidance with established legal precedents, providing consistency and clarity for organizations governed by the FLSA. By reinstating a multifactor analysis approach utilized by courts for many years, the rule ensures that various factors are considered comprehensively in determining a worker’s status. These factors include the worker’s opportunity for profit or loss, investment in the work, the nature of the work relationship’s permanence, the degree of employer control, the work’s essentiality to the employer’s business, and the worker’s skill and initiative.

According to the new rule, employers must now consider several key factors when designating a worker as an independent contractor:

  • Opportunity for profit or loss depending on managerial skills: This factor evaluates whether the worker’s managerial decisions influence their economic success or failure.
  • Investments by the worker and the potential employer: It assesses whether the worker’s investments are of a capital or entrepreneurial nature.
  • Degree of permanence of the working relationship: This factor examines the expected duration of the worker’s engagement with the business without specifying a specific timeframe.
  • Nature and degree of control: It encompasses various aspects such as scheduling, supervision, pricing autonomy, and the ability to work for other entities.
  • The extent to which the work performed is an integral part of the potential employer’s business: The work done needs to be considered along with the impact of the worker’s departure on the organization’s operations.
  • Skill and initiative: It evaluates whether the worker utilizes specialized skills and demonstrates business-like initiative in performing the work.

While the above six factors are crucial, there are more factors that you need to consider. Suppose these factors and other relevant considerations indicate that a worker is economically dependent on the employer. In that case, the worker should be classified as an employee, potentially eligible for health coverage, annual raises, unemployment insurance, and workers’ compensation benefits.

The new rule may present significant challenges for employers utilizing independent contractors. While many workers may still fit within the independent contractor category, a notable portion of the current workforce may need to be reclassified as employees under the new criteria. It’s important to note that misclassification could lead to penalties, legal liabilities, and even possible criminal liability if there is willful misclassification. Given the potential penalties and legal liabilities, employers are strongly advised not to delay in addressing these classification challenges. Immediate action is necessary to ensure compliance with the new DOL rule on worker classification.

Overall, the DOL’s final rule on worker classification seeks to promote fairness, protect workers’ rights, and foster a level playing field for businesses operating under the FLSA.

501(c) HR Services is here to walk you through the process and provide you and your organization with tools to help ensure your nonprofit stays in compliance.

About Us

For more than 40 years, 501(c) Services has been a leader in offering solutions for unemployment costs, claims management, and HR support to nonprofit organizations. Two of our most popular programs are the 501(c) Agencies Trust and 501(c) HR Services. We understand the importance of compliance and accuracy and are committed to providing our clients with customized plans that fit their needs.

Contact us today to see if your organization could benefit from our services.

Are you already working with us and need assistance with an HR or unemployment issue? Contact us here.

The information contained in this article is not a substitute for legal advice or counsel and has been pulled from multiple sources.

(Images by 4045 and Freepik)

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