Although Wireless Estimator has provided the six-factor test and general guidelines for determining independent contractor status, legal consultation may be necessary to navigate this complex regulatory environment.
A new rule under the Fair Labor Standards Act (FLSA) to classify whether a worker is an employee or an independent contractor became effective March 11, 2024, and a random sampling of four smaller-sized wireless contractors found that three of them needed to be made aware of the rule. A fourth said he did know there were significant changes, but he needed to review it to ensure that his current and future independent contractors complied with the new guidelines issued by the Department of Labor (DOL).
The new law presumes every worker is an employee, and the employer has the burden of overcoming that presumption to classify a worker as an independent contractor.
Earlier this year, the DOL introduced a significant revision to the criteria used to classify workers under the FLSA. This development, which defines a new six-factor test for distinguishing between employees and independent contractors, is set to reshape the regulatory landscape for American businesses and their workers. This new rule will supersede a previous 2021 proposal that had been mired in legal challenges and was never implemented.
Evolution of the DOL’s classification criteria
Historically, the DOL utilized a multifactorial approach to determine worker status, which included a seven-factor framework focusing broadly on the relationship between worker and employer. In 2020, the Trump administration attempted to streamline this into a five-factor test emphasizing the employer’s control over the work and the worker’s profit or loss opportunities. However, the implementation was halted by the succeeding Biden administration, which has now opted for a revised six-factor test. This test largely mirrors pre-2021 guidance and is designed to offer a more balanced assessment of employment relationships.
The U.S. Chamber of Commerce said that the rule is “clearly biased toward declaring most independent contractors as employees” and that it would carefully weigh all of its actions moving forward, “including litigation.” Also, a coalition of business groups has already filed a legal challenge to the new rule, arguing that the DOL did not follow appropriate procedures in passing new regulations.
The six-factor test explained
The newly adopted six-factor test includes the following criteria that can be found in the Department of Labor ‘s 226-page document:
Opportunity for Profit or Loss: This examines whether the worker can influence earnings through managerial skills, such as setting prices, selecting jobs, and employing marketing strategies.
Investments by the Worker and the Employer: This factor compares the investments made by the worker and the employer in the context of their roles in the business, evaluating whether the worker’s expenditures support an independent business operation.
Permanence of the Relationship: Here, the focus is on the duration and exclusivity of the relationship, with shorter, non-exclusive engagements pointing towards independent contractor status.
Nature and Degree of Control: This involves assessing how much control the employer has over the work performed, including scheduling, supervision, and economic conditions such as pricing and marketing.
Extent to Which the Work is Integral to the Business: This criterion considers whether the work performed is central to the employer’s business, suggesting an employment relationship.
Skill and Initiative: This factor evaluates whether the worker uses specialized skills that contribute to a business-like initiative, favoring independent contractor status if so.
Application of the test and implications for businesses
The new rule encourages a “totality-of-the-circumstances” approach, meaning that no single factor is determinative; all relevant factors are considered in aggregate. This economic reality test allows for flexibility but also requires careful consideration by employers to ensure accurate classification.
Comparison with the “ABC test”
The 2024 Rule clarifies it only applies to FLSA and does not impact classifications under other statutes such as the Internal Revenue Code, National Labor Relations Act, Title VII, or common law.
It is important to note that this federal rule differs from the “ABC Test” used in several states, a stricter standard for classifying workers as independent contractors. Unlike the ABC Test, which has three rigid criteria, the DOL’s test is more flexible and nuanced, potentially allowing for different outcomes based on the specific circumstances of each case.
IRS classification for independent contractors differs from the DOL
The IRS maintains the following employee classification rules that apply to contractors and employees:
“The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.”
Future outlook and employer action
With the rule currently in effect, businesses should begin reviewing their worker arrangements to ensure compliance. This may involve conducting audits of existing contractor relationships and making necessary adjustments based on the new framework. Additionally, employers must remain mindful of state and local laws, which may impose different or more stringent requirements.
Wage law violations from misclassification can be costly
Employers who classify individuals as independent contractors when they should be recognized as employees may face legal consequences for failing to adhere to the FLSA and state wage laws. These laws mandate payment of overtime and minimum wages. Non-willful violations, where the employer was unaware they were breaching the law, carry a statute of limitations of two years for wage claims. The statute extends to three years for willful violations, where the employer knew or should have known they were acting against the law.
Violations can result in criminal penalties and financial liabilities for back wages directed at employers and their executives. The DOL which has increased its workforce of investigators to enforce wage compliance, pays close attention to these issues, particularly the proper classification of workers.
Moreover, the civil liabilities for companies that misclassify employees can be substantial. Violations can lead to significant penalties including the payment of back wages for unpaid overtime and unmet minimum wage requirements, doubled as liquidated damages, and the coverage of attorney’s fees.