In January 2024, the U.S. Department of Labor (DOL) published its Final Rule on Employee or Independent Contractor Classification - a rule that took effect on March 11th. This rule provides guidance for employers in determining worker classification under the Fair Labor Standards Act (FLSA).

Acting Secretary of Labor Julie Su said this rule would "ensure a level playing field for workers," particularly vulnerable workers who can be misclassified and lose out on minimum wage, overtime pay, and other protections ensured under the FLSA.

But what does this mean for employers? Are there risks - or opportunities - associated with this new ruling? Keep reading to get the facts about worker misclassification and protect your company.

The Risks of Misclassification

Companies use independent contractors (ICs) for several reasons, including cost control, access to specialized skill sets, and adding flexibility to their workforce. But the penalties for misclassifying employees as ICs, or vice versa, can be steep.

• Misclassified workers have filed (and won) court cases seeking retroactive employee benefits.
• States like Connecticut have increased fines for misclassifying workers as independent contractors.
• The Internal Revenue Service (IRS) has increased workforce audits in recent years and is penalizing misclassification more severely.
• The Patient Protection and Affordable Care Act (PPACA) exposes companies to additional penalties for failure to obtain healthcare coverage based on misclassification - even if workers are misclassified in good faith.
• The Occupational Safety and Health Administration (OSHA) protects whistleblowers who point out PPACA violations.

Factors the DOL Will Consider

The DOL's new 2024 rule will retain the multifactor, "totality-of-the-circumstances" approach for analyzing IC's status from their 2022 proposed rule on the same subject. In this approach, the DOL considers six factors when examining whether a worker is classified correctly:

1. The worker's opportunity for profit or loss. If the worker has no opportunity for a profit or loss, they likely should be considered an employee.

2. Investments made by the worker and the employer. The DOL will decide how much investment of capital or entrepreneurial effort is given by the worker compared to the potential employer.

3. The degree of permanence in the work relationship. A continuous, indefinite, or exclusive work relationship would indicate employee status, while a project-based relationship usually indicates IC status.

4. The nature and degree of control over performance of the work. If the potential employer sets schedules, supervises the work, and oversees any discipline required, it indicates the worker is an employee, not an IC.

5. The extent to which the work being performed is an integral part of the employer's business. If the work being done is integral to the business, the worker is likely an employee. If the work isn't integral, it weighs toward the worker being an IC.

6. The use of the worker's skill and initiative. If a worker needs training or isn't using specialized skills, it weighs toward them being an employee.

The rule also indicates that additional factors could be considered if they illustrate the economic dependence between a worker and potential employer.

Implications for Employers

You're probably asking yourself: what does all this mean for employers?

If the rule goes into effect - it's currently being challenged, with some lawmakers gunning for a repeal - it will be more likely that certain workers currently classified as ICs will need to be reclassified as employees. This means those reclassified employees will be eligible for minimum wage and overtime protections. They could also be eligible for employer benefits like health coverage and even retirement benefits.

The gig economy is likely to be strongly affected. App-based platforms (Uber, DoorDash, etc.) have traditionally classified their workers as ICs, and that may have to change. Other industries like construction, transportation, logistics, and media could also see ramifications.

In general, the ruling could make companies more wary of hiring short-term independent contractors. Small business, especially, may decide it's not worth the worry or money to deal with potential compliance issues.

Worried About Misclassification? Your Staffing Partner Can Help!

Misclassification of independent contractors and employees can be difficult - and it's not getting any easier. If the risks of misclassification are keeping you up at night, turn to your staffing partner.

Temporary staffing services are a viable alternative to bringing on independent contractors. Temporary workers are employed by the staffing firm, not your business. These workers are not independent contractors, and they're not your employees, either.

Plus, because the staffing firm acts as the Employer of Record, they're responsible for meeting PPACA requirements and maintaining compliance. This lets you mitigate risks and get important work done, all without the headaches.

Get in touch with your staffing partner to get started.

This article offers a general perspective and does not constitute legal advice. If you have a specific legal question, consult an attorney licensed to practice law in your area.