Means again in October 2022, we mentioned the U.S. Division of Labor’s (DOL) issuance of a discover of latest rule that may considerably change the take a look at for whether or not a employee is an worker, and thus lined by the minimal wage and extra time provisions of the Truthful Labor Requirements Act (FLSA), or is an impartial contractor, and due to this fact not lined by these FLSA provisions. After an intensive notice-and-comment interval, on January 10, 2024, the DOL revealed the ultimate rule.

As anticipated, the ultimate rule rescinds the employer-friendly “core components”[1] customary introduced by the DOL through the waning days of the Trump Administration in favor of a extra complicated and stringent “totality of the circumstances”[2] customary, beneath which nobody issue is assigned any predetermined weight. The brand new customary broadens the scope of the evaluation by requiring employers to use a extremely fact-specific multifactor customary however doesn’t information employers on methods to stability or weigh the components. As a sensible matter, this may possible end in heightened enforcement discretion for the DOL and can make it tougher for employers to gauge whether or not they’re correctly classifying their staff as impartial contractors.

Misclassifying staff as impartial contractors could be extraordinarily expensive for companies. Below the FLSA, misclassified staff could also be entitled to unpaid minimal wages and extra time, liquidated damages, unpaid payroll taxes and different contributions, civil financial penalties and attorneys’ charges and prices. Understandably, employers are involved concerning the implications of the DOL’s rulemaking, as modifications to classification requirements carry important penalties for companies throughout industries.

It is very important notice that the rule does present steerage on how the DOL will interpret impartial contractor classifications. Nonetheless, courts aren’t required to defer to the DOL’s interpretations, and the ultimate rule doesn’t impression state or native legal guidelines that use totally 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 several other different states).

The ultimate rule goes into impact on March 11, 2024, however is already dealing with at the least two authorized challenges in federal courts. Simply two days after the rule was revealed, a coalition of enterprise teams requested the U.S. Court docket 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 searching for to invalidate the ultimate rule, which it criticizes as “so obscure, amorphous, and context-dependent [that] it gives nearly 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 revealed, a gaggle 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 impartial contractor classification.

[1] Below the Trump-era rule, the 2 “core components” deemed most probative of impartial contractor standing have been: (1) the character and diploma of the person’s management over the work, and (2) the person’s alternative for revenue and loss.

[2] The “totality of the circumstances” customary beneath the ultimate rule requires consideration of the next components to find out whether or not, as a matter of “financial actuality,” a employee is an worker or an impartial contractor: (1) the chance for revenue or loss relying on managerial talent; (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) talent and initiative. The ultimate rule additionally instructs that “extra components can also be thought of if they’re related to the general query of financial dependence.”