President Biden’s recent contractor rule, issued by the Department of Labor, aims to strengthen protections for workers by revising the criteria used to determine their classification as independent contractors or employees. The rule, effective from March 11, 2024, replaces the previous administration’s approach, which was perceived to offer more leeway for employers to classify workers as independent contractors, potentially depriving them of essential benefits and protections.
Under the new rule, known formally as the “Employee or Independent Contractor Classification Under the Fair Labor Standards Act,” a six-factor “economic realities” test is employed to evaluate a worker’s status. These factors include:
- Opportunity for Profit or Loss: This assesses the extent of control a worker has over their rates and marketing compared to the employer. Workers with greater autonomy over these aspects are more likely to be classified as contractors.
- Investments by the Worker and Employer: The allocation of resources such as tools and equipment, whether by the worker or employer, is taken into consideration.
- Degree of Permanence of the Work Relationship: The expected duration of the work relationship, including whether there is a specific end date to the contract, influences the worker’s classification.
- Nature and Degree of Control: This factor evaluates the level of control exercised by the employer over the worker’s tasks, schedule, and work location.
- Extent to Which the Work Is an Integral Part of the Employer’s Business: The significance of the worker’s tasks to the employer’s core operations is considered.
- Skill and Initiative: This examines whether the worker possesses unique skills or demonstrates initiative indicative of a business-like approach.
These criteria, a ‘totality of the circumstances’ methodology shapes the determination of worker status. This rule also permits consideration of additional factors deemed pertinent to the overarching question of economic dependence. Some see it as a positive step towards protecting workers’ rights and reducing instances of misclassification. It aims to ensure that workers receive the benefits and protections they are entitled to under the Fair Labor Standards Act (FLSA), including minimum wage, overtime pay, and workers’ compensation benefits. Opponents, however, see the change will have a negative effect on hiring contractors, undermining the contractor model – and forcing workers out of the market.
Hiring independent contractors over employees can yield significant advantages for both employers and workers. Employers can save time, money, and resources in managing their workforce, and contractors can retain flexibility and autonomy over their work schedules. This rule tips the scales in favor of finding that workers are employees rather than contractors, depriving workers in flexibility and job opportunity.
Determining who is an employee vs. an independent contractor also impacts your benefits, 401k or health plan. It’s critical for businesses to stay on top of these new rules.