This week, the Department of Labor (DOL) passed its final rule on worker misclassification. This rule had been fast-tracked through the notice and comment period to meet year end. According to Wage and Hour Division Administrator Cheryl Stanton: “The rule…continues our work to simplify the compliance landscape for businesses and to improve conditions for workers.”

Here are the top five things you need to know:

  1. The new test to determine whether a worker is an Independent Contractor (IC) will be easier to meet (in theory). The test has two main prongs, with three sub-prongs should the first two not be conclusive of IC or W-2 employee classification. Here is the test:
    • 2 Core Components: (1) The nature and degree of the individual’s control over the work and (2) The individual’s opportunity for profit or loss.
    • 3 Additional Components: (1) The amount of skill required for the work (2) The degree of permanence of the working relationship between the individual and the putative employer (3) Whether the work is part of an integrated unit of production
  2. Economic dependence is the key to being an IC under the test. The focus for this analysis will be on the nature and degree of workers’ control over their work as well as the opportunity for profit or loss based on factors like the workers’ initiative, investment or both.
  3. The rule is limited to any actions arising under or concerning the Fair Labor Standards Act’s classification of workers as IC or employee (FLSA). The FLSA concerns minimum wage and overtime requirements, among other things.
  4. State laws, like California’s AB5, and IRS tests, still need to be met. The rule will have no effect on narrower state wage and hour laws and enforcement actions initiated by various state departments of labor or other agencies.
  5. It’s unclear whether the change in Presidential administration could impact the new rule. It was a Trump-era rulemaking and what we have seen before is that rules at the Federal-level often change with administrations.

For now, businesses should consider any misclassification actions under FLSA scrutiny as easier to defend, but should continue to be focused on IC compliance to both utilize the competitive advantage of using ICs and to maximally comply with the various regulations in this space.

TalentWave can help you understand these news laws, enabling you to keep your organization and your ICs safe from potential worker misclassification. Please contact us with any questions.