16 Jan Who is an Independent Contractor Now?
Who is an Independent Contractor Now?
An Overview of the Fair Labor Standards Act Final Rule – Effective March 11, 2024
In the dynamic landscape of employment, the distinction between employees and independent contractors holds significant implications for both workers and employers. The Fair Labor Standards Act (FLSA) plays a crucial role in defining and regulating this distinction, aiming to ensure fair labor practices. In this blog post, we will delve into the concept of independent contractors under the FLSA updated rule (Published January 10th, 2024), exploring the criteria that determine their status and the impact it has on labor relations.
Does the FLSA apply to you as an employer:
The FLSA, enacted in 1938, establishes the minimum wage, overtime pay eligibility, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments.
The Fair Labor Standards Act applies in several circumstances. It applies to employers with at least two employees and an annual volume of sales or business of at least $500,000.00; certain types of businesses, including government agencies, hospitals, residential medical/nursing care, and schools; and also, employers where the work regularly involves commerce between or across states. This can be as simple as employees regularly drafting or mailing correspondence that will be sent out of state, or regularly making telephone calls to people located in other States. These are just two examples.
Do we still use the 2021 Independent Contractor Rule and its analysis?
No. The final rule published in January 2024 rescinds the 2021 rules.
How does the new rule determine whether someone is an employee or independent contractor under the FLSA?
It depends. Kidding, kind of.
The updated rule is a return to an “economic reality” test that is very fact dependent. There are six factors that should be considered in determining the economic realities of the working relationship. The factors are not weighted and are considered together based on the facts of each particular situation.
1. Opportunity for Profit or Loss Depending on Managerial Skill
Some examples of questions to ask in this factor include can the worker accept or decline jobs? Does the worker make managerial decisions that impact their opportunity to make more or less money? Does the worker engage in efforts to expand the business or secure more work?
Independent contractors often have the opportunity to make a profit or incur a loss based on their performance. This financial risk sets them apart from employees who receive a fixed salary or hourly wage.
2. Investments by the Worker and the Potential Employer
Facts that can be relevant here include investments of money into tools and resources for the job. Who is providing the tools, equipment, and resources to do the work?
Independent contractors usually invest in their tools, equipment, or workspaces, reinforcing their status as separate business entities.
3. Degree of Permanence of the Work Relationship
Is it anticipated that the working relationship will be continuous or indefinite versus a shorter-term or project-based working relationship? Does the worker perform work for others/have other clients? Is the worker in business for himself/herself?
4. Nature and Degree of Control
How much control do you maintain over the performance of the work? Do you set the worker’s schedule? Do you supervise performance? Do you discipline the worker? Do your policies prohibit the worker from working for others?
Independent contractors typically have more control over their work, deciding how tasks are performed and when they are completed. Less control by the hiring party suggests a greater likelihood of independent contractor status.
5. Extent to Which the Work Performed is an Integral Part of the Potential Employer’s Business
How essential is the work to your business? If the work performed is a necessary part of your business, that would lean more toward an employee relationship.
6. Skill and Initiative
Does the worker have specialized skills needed to perform the work and are those skills part of a “business-like initiative” or in other words does the worker use those skills to market themselves to others and/or perform work for multiple companies? Or does the worker require training from you to complete the work?
Independent contractors typically bring specialized skills and operate autonomously.
Is this the only rule I need to worry about regarding worker classification?
Unfortunately, no. The Internal Revenue Code (IRS) and the National Labor Relations Board have different language and precedents regarding how to determine if someone is an employees versus an independent contractor. State labor laws also use different tests. You must comply with federal, state, and local laws.
What happens if I misclassify employees as independent contractors?
For employers, misclassifying workers can lead to legal consequences, including back pay, fines, and penalties. Workers, on the other hand, may lose out on essential benefits, such as minimum wage, overtime pay, and workers’ compensation, if misclassified as independent contractors.
Putting It All Together
In a nutshell – If a worker is economically dependent on you for work – that person is an employee. That person likely does not have their own business, does not perform work for anyone else, and is subject to some degree of control/supervision by the person or company employing them.
Under the FLSA, independent contractors are individuals who, as a matter of economic reality, are in business for themselves. This means that they operate as their own bosses, determine their work schedules, and have the potential for profit or loss based on their managerial skills and business acumen.
While you absolutely should have a contract with independent contractors that outlines things like the scope of work, deliverables, and payment terms – if the actual reality of that job is that of an employee – your contract will not make them a contractor.
Here are more resources:
If you would like to discuss how you are employing workers, including any changes you need to make based on this updated rule, or drafting updated independent contractor agreements, you can schedule a consultation on our website or call the office at 918-938-1322.
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