Recently, the Department of Labor (DOL) released the 2024 updated rule on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA).

The Fair Labor Standards Act

For those of us who missed class that day, let’s start with a quick history lesson. The FLSA first went into effect in 1938, and has been a fundamental piece of Labor Law, ensuring minimum wage and overtime pay for eligible employees.

Since those regulations applied specifically to employees, independent contractors were not included in those worker protections. And so, things got a bit complex and a little sticky, as they tend to do when humans are involved.

If businesses didn’t have to follow minimum wage or overtime for independent contractors, then it was very attractive to those businesses to hire workers as contractors and skip out on employer taxes, required benefits, as well as the FLSA requirements around wages.

So who was to say when a business had to hire a worker as an employee vs an  independent contractor? The FLSA Act offered very limited guidance on differentiating employees from independent contractors.

The 2024 FLSA Rule

Over time, the DOL has sought to resolve this ambiguity (that stickiness we were talking about earlier) with rules to distinguish between contractors and employees and save both the workers and business a lot of headaches.

After some legal questions and back and forth, the DOL has recently updated the rule and here is what all businesses need to understand.

There are six factors to determine if a worker could be employed as an independent contractor or was required to be an employee.

1. Opportunity for Profit or Loss: Focuses on the independence of the contractor in financial decision-making.
2. Investment Comparison: Assesses if both the worker and business both  invest in the working relationship.
3. Permanence of Relationship: Evaluates the duration and nature between the worker and the business.
4. Degree of Control: Scrutinizes how much control the worker has over their scope of work and working conditions.
5. Integral Part of Business: Determines if the work performed is a core element of the businesses operations.
6. Skill and Initiative: Considers if the worker utilizes a speciality skill set and business-like initiative or if the work is done based on training from the business.

Some of these will look very familiar as these are very similar to the standards the IRS uses to assess tax liability in working relationships.

New and Noteworthy

So, what’s new and what does it mean for your business? This is great, now we are getting down to brass tacks.

There are a few particularly notable updates. First,  the new rule specifies that the six factors stand and work together, not in isolation. Basically a business can’t pluck one factor out that fits their workers’ criteria and make all their workers Independent Contractors. Just ask WingStop what happens when you try to point to one of these factors instead of the whole story.

Second, the new rule stressed the importance of the economic dependency of a worker. It must be clear and provable that any independent contractors are “in business for themselves, as opposed to being economically dependent on the potential employer for work.”

Third, and urgently important. The new rule almost universally favors employee status. That is bold and italic worthy for businesses to take note! This means that properly classifying your workers as employees vs independent contractors  is mission-critical.

What To Do Now

To ensure your business is protected from any regulatory violations, let’s talk about the path forward. Here at ClearPath we specialize in helping businesses properly engage their workers to be compliant to regulations exactly like the FLSA and its new rules. Here are our recommendations for preparing your business for this update:

Enhance Independent Contractor Parameters

Review all Independent Contractor engagements and ensure they are up to snuff. Update their documentation and put them through an independent evaluation to ensure their contractor status, gather their business documentation, and proactively measure for each of the six factors spelled out earlier.

ClearPath’s ClearIC is an evaluation service designed to ensure that your contractors are compliant with both the new FLSA rule and your state and local regulations as well.

Re-Engage Workers as Employees

Should your review uncover any uncertainty about how to engage workers, take steps to protect your business and engage those workers as employees. Even if your business relies on flexible working arrangements with workers.

Many businesses leverage the flexibility of contractors but are still responsible to their workers under regulations such as this new rule. ClearPath offers the best of both worlds with our Employer of Record (EOR) services.

EOR services offer the best of both worlds to allow the business of the flexibility of contractors with the compliance and protections of employees. EOR services allow you to outsource your back office Human Resources and Payroll functions.

Talk to a Professional

We get it, this topic is a little dry and a lot confusing. There is no lack of questions and head-tilts when we share information about this.

Be sure to consult a professional about how you engage workers to ensure compliance and protections from complaints and audits. Contact us today for a free consultation on your current worker engagements. We will provide insight and recommendations based on your specific situation.

ClearPath is a leading Human Resources Outsourcing company focusing on assisting employers to leverage the independent contractor labor market. We’re committed to helping business owners stay compliant and minimize the risks associated with their contingent labor requirements.

No Legal Advice Intended. This article includes general information about legal issues and developments in the law. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. You need to contact a lawyer licensed in your jurisdiction for advice on specific legal issues.