In an announcement on January 9, 2024, the U.S. Department of Labor (DOL) unveiled a final rule impacting how small businesses differentiate between employees and independent contractors concerning minimum wage and overtime pay compliance under the Fair Labor Standards Act (FLSA). This article aims to dissect the significant changes and considerations, providing clarity for small business owners navigating this regulatory shift.

The Six-Factor Test

The new rule reintroduces a six-factor test that centers on the economic reality of the worker’s relationship with the employer. These factors include the opportunity for profit or loss, investments by both the worker and employer, the permanence of the relationship, the nature and extent of control, the integral role of the work in the employer’s business, and the worker’s skill and initiative. Emphasizing a comprehensive evaluation, no single factor is conclusive.

Positive Aspects for Businesses

While not entirely novel, the six-factor test has historical roots in employment law, tracing back to a 1947 U.S. Supreme Court case. The well-established case law provides businesses with guidance, aligning with the DOL’s claim that the new rule is consistent with long-standing practices and federal appellate case law. Crucially, the DOL acknowledges the crucial role played by independent contractors in the economy and assures that the rule aims to support businesses rather than disrupt them.

DOL’s Modifications in Favor of Businesses

Responding to public comments, the DOL implemented substantial modifications, particularly to factor four, focusing on the “nature and degree of control.” The final rule specifies that control exercised to comply with specific legal requirements does not necessarily indicate employee status. Additionally, the rule addresses the relative investments made by the worker and the company, emphasizing the nature of these investments rather than a direct dollar-for-dollar comparison.

Challenges and Lack of Certainty

While the new rule introduces positive aspects, it is evident that the intention is to narrow the scope of independent contractors compared to the previous rule. Acting Secretary of Labor Julie Su emphasizes the need for worker protections while leveling the playing field for employers. However, achieving certainty remains challenging, as cases under the multi-factor test continue to be highly fact-specific, leaving room for uncertainty in individual situations.

Looking Ahead

The rule is set to take effect on March 11, 2024, but legal challenges are anticipated. Small businesses are encouraged to proactively review their independent contractor relationships, considering the revised test and making necessary classification adjustments to mitigate risks associated with litigation and misclassification.

In navigating the U.S. Department of Labor’s new rule, small businesses should stay informed about the intricacies of the six-factor test, understand the modifications made in their favor, and be proactive in reviewing and adjusting their independent contractor relationships to align with the revised requirements. For further guidance on these developments, small business owners are encouraged to consult with The Walsh Law Firm, or their own employment attorney to stay informed.