What happened? On April 3, the Michigan Chamber hosted an educational webinar with Bodman PLC exploring the new U.S. Department of Labor (DOL) independent contractor rule, which went into effect March 11, 2024.
The big picture: The DOL’s new rule, “Employee or Independent Contractor Classification Under the Fair Labor Standards Act” (FLSA), adopts a six-factor test that asks whether, as a matter of economic reality, a worker is economically dependent on the employer or is in business as an independent contractor.
The six factors are:
- Opportunity for profit or loss based on managerial skill.
- Investments by the worker and the potential employer.
- Degree of permanence of the relationship.
- Nature and degree of control.
- Extent to which the work performed is an integral part of the potential employer’s business.
- Skill and initiative.
Key considerations:
- The new rule is specific to the FLSA. The FLSA sets federal rules for minimum wages and overtime. It also requires covered employers to keep certain records. But those standards and requirements apply only to “employees” and do not apply to independent contractors. The distinction between employees and independent contractors determines whether the FLSA applies or not.
- While different state and federal rules and laws (e.g., IRS, unemployment, workers’ compensation, the National Labor Relations Board (NLRB)), set different criteria and rules for determining classification, a good rule of thumb is to apply the strictest standard when determining whether to classify a worker as an independent contractor or worker.
- Determining whether a worker is an employee or an independent contractor isn’t always going to be black and white. Under the rule, no single factor is determinative; rather, the “totality of the circumstances” controls. Additional factors may be considered if they are relevant to the overall question of economic dependence.
- The new rule could potentially lead to an influx of litigation against businesses using independent contractors. Employers found violating the rule could be required to pay back wages, including overtime, reimbursement for out-of-pocket expenses, penalties and liquidated damages and other criminal and civil penalties. As Bodman put it: there is no defense for “we thought we were doing it right.”
- Employers using independent contractors should conduct an internal audit of workers and consult with legal counsel.
- The rule is facing four separate lawsuits, including in Texas, Georgia, Tennessee, and Louisiana, from freelance writers to a trucking company. Even one chamber of Congress proposed a bill to nullify the rule. If these challenges are successful, it is possible the prior rule could be reinstated.
Go deeper: Watch the recording of the webinar or view the DOL’s FAQ document.