How the new Department of Labor rule will impact misclassification of independent contractors
Independent workers make up about 45% of the U.S. workforce, according to a 2023 report from MBO Partners, a platform dedicated to meeting their needs. That’s more than 72 million Americans, with nearly 30 million of them working independently full-time.
While many of them have chosen the freedom that this type of lifestyle offers, some have been misclassified and should be considered employees instead. This misclassification may result in loss of income, ineligibility for state and federal unemployment systems, etc. Nearly 10% of independent contractors make less than $7.25 per hour, according to the National Employment Law Project.
“Misclassification is an issue that affects many low-wage industries such as construction, transportation, and home health care,” says Sally Durack-Fisher, a senior staff attorney at NELP. But “people in every occupation and at all wage levels” can be vulnerable to it, says Samantha Sanders, director of government affairs and advocacy at the Economic Policy Institute.
A new rule change under the Fair Labor Standards Act, which is scheduled to take effect March 11, aims to reduce this misclassification. Here’s what it means for workers.
The Department of Labor uses what’s called the economic reality test to determine whether a worker should be classified as an independent contractor or employee. Under the upcoming rule change, the test uses six measures to analyze that relationship:
- Opportunity of profit or loss according to management skill: This factor covers the worker’s ability to meaningfully negotiate prices for services or goods and make marketing-related business decisions, both of which indicate independent contractor status.
- Worker and employer investments: “Does the worker undertake the work to purchase the tools, equipment and other expenses he or she needs to do the work or does the potential employer provide them?” Sanders says. If the latter, this may indicate employee status.
- Degree of continuity of the employment relationship: “A relationship of indefinite duration refers to employee status,” according to NELP.
- Nature and degree of control: This factor looks at the employer’s ability to supervise work, its ability to set the worker’s schedule, its ability to limit the worker’s freedom to work for others, and so on. If the employer has a high degree of control, the worker may be considered an employee.
- Whether the work performed is an integral part of the employer’s business: NELP gives examples of “a janitor working for a janitorial company, a tomato picker working on a farm, and a food delivery person working for an app-based delivery company” as workers doing “work central to the employer’s business.”
- Skill and initiative: This measure takes into account whether the work requires special skills and whether those skills help the worker “exercise business-like initiative,” according to NELP. If not, the worker may be considered an employee.
These metrics are not entirely new.
In fact, the rule change is merely a return to the rule of who is or is not an independent contractor, which existed before the 2021 change focused on two elements of the economic reality check, whether or not the worker can control the working conditions and their opportunity for profit and loss. .
According to the Department of Labor’s press release about the new rule, the 2021 change “is inconsistent with the law and long-standing judicial precedent.”
the The updated rule will likely affect workers who are paid less than the federal minimum wage $7.25 per hour, or $10.88 per hour overtime pay When they work more than 40 hours a week.
In order to benefit from the rule change, “you must be a covered employee (and… no An independent contractor running your own business, which is what the guidelines talk about) And “They will be deprived of the wages guaranteed by law,” says Durak-Fisher.
If you believe you were misclassified and did not receive federal minimum wage or overtime pay, the Department of Labor recommends gathering information such as the name of the company you work for and how and when you are paid, and then filing a claim online or on the phone with the Department of Labor, which You will decide whether an investigation is the best course of action.
“But for this very short-lived rule as of 2021, we are going back to the analysis that courts have used for nearly 80 years,” says Durak-Fisher.
“It’s not any kind of massive sea change,” she says. Any independent contractor who wants to retain this designation can continue to do so.
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