Method again in October 2022, we mentioned the U.S. Division of Labor’s (DOL) issuance of a discover of recent rule that will considerably change the take a look at for whether or not a employee is an worker, and thus coated by the minimal wage and time beyond regulation provisions of the Honest Labor Requirements Act (FLSA), or is an unbiased contractor, and subsequently not coated by these FLSA provisions. After an intensive notice-and-comment interval, on January 10, 2024, the DOL printed the remaining rule.
As anticipated, the ultimate rule rescinds the employer-friendly “core elements” normal introduced by the DOL through the waning days of the Trump Administration in favor of a extra advanced and stringent “totality of the circumstances” normal, beneath which nobody issue is assigned any predetermined weight. The brand new normal broadens the scope of the evaluation by requiring employers to use a extremely fact-specific multifactor normal however doesn’t information employers on steadiness or weigh the elements. As a sensible matter, this may seemingly lead to heightened enforcement discretion for the DOL and can make it harder for employers to gauge whether or not they’re correctly classifying their staff as unbiased contractors.
Misclassifying workers as unbiased contractors could be extraordinarily expensive for companies. Underneath the FLSA, misclassified staff could also be entitled to unpaid minimal wages and time beyond regulation, liquidated damages, unpaid payroll taxes and different contributions, civil financial penalties and attorneys’ charges and prices. Understandably, employers are involved in regards to the implications of the DOL’s rulemaking, as adjustments to classification requirements carry important penalties for companies throughout industries.
It is very important word that the rule does present steerage on how the DOL will interpret unbiased contractor classifications. Nonetheless, courts usually are not required to defer to the DOL’s interpretations, and the ultimate rule doesn’t impression state or native legal guidelines that use completely different classification requirements (and there are a lot of of these, most notably, the stringent “ABC” take a look at utilized in California (see right here) and a number of other different states).
The ultimate rule goes into impact on March 11, 2024, however is already going through not less than two authorized challenges in federal courts. Simply two days after the rule was printed, a coalition of enterprise teams requested the U.S. Courtroom of Appeals for the Fifth Circuit to revive their earlier lawsuit difficult the DOL’s proposed rule as being in violation of the Administrative Procedures Act. A federal district courtroom in Texas initially sided with the coalition in 2022 after then-proposed rule was introduced, however the motion was stayed pending completion of the DOL’s rulemaking course of. The coalition is now in search of to invalidate the ultimate rule, which it criticizes as “so obscure, amorphous, and context-dependent [that] it gives just about no certainty or assurance that any given employee is classed appropriately as an worker or contractor.”
In one other authorized problem introduced simply six days after the ultimate rule was printed, a bunch of freelance writers sued the DOL in a federal courtroom in Georgia. The freelancers have requested the courtroom to cease the rule from going into impact, arguing that it’s unconstitutionally obscure and that the DOL violated the executive rulemaking course of in adopting the ultimate rule. Extra authorized challenges are anticipated.
We’ll proceed to watch for additional developments and can be found to offer steerage to companies navigating the complexities of unbiased contractor classification.
 Underneath the Trump-era rule, the 2 “core elements” deemed most probative of unbiased contractor standing had been: (1) the character and diploma of the person’s management over the work, and (2) the person’s alternative for revenue and loss.
 The “totality of the circumstances” normal beneath the ultimate rule requires consideration of the next elements to find out whether or not, as a matter of “financial actuality,” a employee is an worker or an unbiased contractor: (1) the chance for revenue or loss relying on managerial ability; (2) investments by the employee and the potential employer; (3) the diploma of permanence to the work relationship; (4) the character and diploma of management; (5) whether or not the work carried out is an integral a part of the potential employer’s enterprise; and (6) ability and initiative. The ultimate rule additionally instructs that “extra elements may be thought of if they’re related to the general query of financial dependence.”