Recently, the Department of Labor proposed a new rule clarifying the independent-contractor definition under the Fair Labor and Standards Act (FLSA). It can describe establishing and maintaining workers’ classification by impacting litigation risks and compliance costs. Though the existing rule is employer-friendly during workers classification under FLSA, the DOL’s proposed rule can change the view. So, what is the new independent contractor proposed rule by the DOL? Let’s have a look!
If the Department of Labor adopts an employee-friendly rule, the workers who come under the independent contractor’s category may get employee protections. They will also get benefits, like the right to minimum wage, unemployment insurance, overtime pay, and worker’s compensation. However, offering such benefits to workers can be a very expensive task.
The rule takes on the “economic reality” test under which a person is an independent contractor if he is a business. This rule provides the following factors for the classification:
- The degree and nature of a worker’s control of the work.
- The profit and loss opportunity for the worker based on initiatives and investment.
- Skills required to work.
- The permanence degree of the working relationship between a worker and employer.
- Is the work a part of an integrated production unit?
Employers will rely on existing laws to distinguish between employees and independent contractors until this rule takes effect. Current DOL suggests analyzing the following factors on the issue:
- The scope of services provided is a vital part of the main business.
- The relationship permanency.
- Investment of alleged contractors in equipment and facilities.
- The degree and nature of control by the principal.
- The profit and loss opportunities of the alleged contractors.
- Initiative, judgment, and foresight are required for success.
- The independence degree of business operation and organization.
Though the existing test overlaps with the economic reality test in the new rule, the current analysis needs full-scale factors consideration. In addition, the old guidance does not reveal anything about the factors carrying weight in the study. However, the new rule describes that the first and second factor is the most important for the economic reality test. Therefore, the new law has made it easier for employers to differentiate between independent contractors from employees accurately.
The Department of Labor’s proposed rule marks a departure regarding the factors and actual practice matters more than theoretical ones. Businesses that analyze their relationships with service providers and workers must consider federal and state laws. Moreover, they must look at local law wherever applicable before determining a compliant strategy, as workers are entitled to protections. The DOL’s proposed rule provides clarity on classification issues in the jurisdictions under guiding principles of federal law.
To Sum Up
The new independent contractor proposed rule by the DOL says that worker’s classification as an independent contractor or employee greatly affects the rights under FLSA. Also, employers must remember that state law may be more beneficial for workers than federal law. The FLSA includes provisions requiring covered employers to make payments to workers or employees at least the federal minimum wages and overtime pay not less than regular rate pay for every hour in a workweek. However, the FLSA protections do not apply to independent contractors.
