Understanding Worker Classification as Outlined in the Fair Labor Standards Act

Understanding Worker Classification as Outlined in the Fair Labor Standards Act

Evaluating the (now six) updated criteria for employees versus independent contractors

On January 9th, 2024, the U.S. Department of Labor announced a final rule under the Fair Labor Standards Act (FLSA) aimed at providing clarity on worker classification. This rule is significant for companies that regularly engage contingent workers, as it may impact various aspects of their business operations.

It is important for organizations regularly involved in the classification of employees (EE) and independent contractors (IC) to thoroughly understand these changes. The new rule means that for new workers, the presumption is that the worker is an employee (complete with all benefits and taxes appropriate for W2 employment) and may only be engaged as an IC if they can show they qualify based on factors outlined in the FLSA. Factors for determining IC status include adequate demonstration of business independence, such as a business license and a tax ID, as well as satisfying six key criteria, which are summarized below.

1. Opportunity for profit or loss, depending on managerial skill

This factor considers whether the intended IC has the ability to negotiate rates, accept or decline jobs, manage project timelines, and control how work is completed. Whether or not the intended IC actively markets and advertises their business, engages other clients, or maintains office space can also be instructive. The intended IC should work independent from the organization.

2. Investments by the worker and potential employer

This criterion looks at whether the worker is growing or maintaining a business – such as by seeking and maintaining additional clients, or investing in tools needed to perform the work – or is reliant on the employer to provide the necessary tools and equipment and is therefore not truly operating independently.

3. Degree of permanence of the work relationship

This criterion considers the length and nature of the work relationship. An indefinite, continuous, or exclusive relationship would confirm employee status. By contrast, a sporadic, non-exclusive, or project-based relationship leans towards independent contractor status.

4. Nature and degree of control

Nature and degree of control evaluates the extent of control exercised by the employer over the worker. Factors such as whether the employer will require a specific schedule, manage how work is completed, or otherwise maintain control of the relationship confirm employee status. If the worker is free to make their own schedule, perform the work how they see fit, and maintain other clients, this leans toward a possible IC classification.

5. Extent to which the work is integral to the employer’s business

This criterion focuses on whether the work performed is critical, necessary, or central to the employer's business. If the work is integral to the employer's business operations, it confirms employee classification. Any work performed by an IC must be demonstrably outside the normal scope of business operations.

6. Skill and initiative

Finally, skill and initiative assesses whether specialized skills are required for the work and if these skills contribute to a business-like initiative. Employee status is confirmed when the worker lacks specialized skills and is dependent on employer training. In contrast, independent contractor status is indicated when the worker possesses specialized skills or expertise that the employer lacks, and they perform this specific work as a business.

The U.S. Department of Labor's final rule under the FLSA provides updated criteria for worker classification, which are essential for businesses to consider when determining the employment status of their workers. By understanding these criteria and seeking professional guidance if needed, businesses can ensure compliance and avoid unwanted outcomes related to worker misclassification.

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