All business owners and freelance workers alike should be familiar with the Fair Labor Standards Act's (FLSA) requirements for paying employees minimum wage ($7.25 per hour) and overtime (time and a half) for every hour over 40 hours per week.
Most employers also know that these wage and pay requirements do not apply to “Independent Contractors.” Independent Contractors also know they can set their own rates outside of the FLSA's requirements of minimum wage. However, whether a worker is classified as an employee or independent contractor is not as simple as slapping a label on and calling it a day.
For years, courts have looked at a variety of factors to decide whether a particular worker is an employee or independent contractor, but one factor was given more weight than the rest: the amount of control the employer exercises over the worker.
The Dept. of Labor has released a new rule, effective March 11, 2024, to determine how a worker is classified. The rule is the product of over ten decades of court decisions and the factors courts use to decide whether the worker is an employee or not.
The rule is called the “economic realities test” and looks at different factors to determine worker status with all factors being given the same weight:
- · Opportunity for profit or loss depending on managerial skill;
- · Investments by the worker and the employer;
- · Degree of permanence of the work relationship;
- · Nature and degree of control;
- · The extent to which the work performed is an integral part of the employer's business;
- · Skill and initiative.
1. Opportunity for Profit or Loss Depending on Managerial Skill – This factor looks at whether the worker has any control over decisions such as scheduling of projects, hiring, and renting office space
2. Investments by the Worker and Employer – how much is the worker spending on tools, equipment, etc. to perform their tasks?
3. Degree of Permanence of the Work Relationship – is the worker performing tasks for an indefinite duration on an exclusive basis for the employer?
4. Nature and Degree of Control – How much control does the employer exert over the worker's performance of job tasks and areas such as scheduling and supervision?
5. The Extent to which the Work Performed is an Integral Part of the Employer's Business – Can the employer's business function without the worker or is the worker's ability to perform tasks critical to the employer's business's success?
6. Skill and Initiative – Does the worker possess specialized skill and their own business initiative?
A 2020 study on the workforce as a whole nationally found that 10-30% of employers misclassify workers.
But how does this new rule affect business owners and independent contractors? Well, everyone has a lot to say about it.
The Coalition for Workforce Innovation, which includes businesses with notorious 1099 status workers such as Mary Kay, Uber, Lyft, and the American Trucking Association, has sued to block the new rule from coming into effect. Louisiana's Senator, Bill Cassidy, has pledged to introduce a resolution to stop the rule from coming into effect.
What's the big deal? Employers are concerned that they may be penalized for classifying workers as independent contractors according to the worker's wishes and failing the new economic realities test. They think without the control factor being given greater weight, it is too unclear and confusing regarding how independent contractors are classified.
Independent Contractors, and the Coalition above that employs them, are concerned the 2024 Rule treats independent contractor status as disfavored and harms workers. Independent Contractors enjoy the freedom their status affords them, perks like autonomy over their schedule and wage.
If you are worried about how the 2024 law will affect your status, as either worker or employer, give BLG a call today.