Wednesday, May 22, 2024

U.S. Department of Labor Finalizes Independent Contractor Rule

Classifying workers as “employees” or “independent contractors” is an important task for agricultural employers because of the legal obligations and protections they owe to their employees. Some agricultural employers hire workers to complete various tasks or provide certain services for their operation, so there are instances where it may be difficult to determine whether a worker is an employee or independent contractor.

Recently, the U.S. Department of Labor (“DOL”) published a new final rule outlining the factors employers must consider when determining whether a worker is an “employee” or an “independent contractor” under the Fair Labor Standards Act (“FLSA”). This new rule replaces the classification framework established by the agency in 2021. Because employers do not owe the same legal obligations to independent contractors as they do their employees, employers must ensure they properly classify workers under the final rule’s new framework. If an employer misclassifies their workers, they may violate the FLSA, which could result in legal fines and penalties from the DOL.

Background

In 2021, the DOL published a rule (the “2021 rule”) establishing the factors employers must consider when designating a worker as an employee or independent contractor under the FLSA. The FLSA is a key federal statute providing labor protections to employees such as minimum wage, overtime pay, and the prohibition of retaliatory practices. While most employees are covered by the FLSA, these protections do not extend to workers classified as independent contractors. A prior NALC article provides a more in-depth overview of employees v. independent contractors.

The 2021 rule, which was expected to go into effect on March 8, 2021, established a five-factor framework employers would weigh to determine whether a worker was an employee or independent contractor. However, the DOL delayed the effective date of this rule, and on May 5, 2021, the DOL withdrew the rule claiming that “the Rule was inconsistent with the FLSA’s text and purpose and would have had a confusing and disruptive effect on workers and businesses alike due to its departure from longstanding judicial precedent.” On Jan. 10, 2024, the DOL published a final rule, which establishes new worker classification guidelines under the FLSA. This rule went into effect on March 11, 2024.

2024 Rule

The DOL’s 2024 rule establishes a six-factor test that employers must use to determine if a worker is an employee or an independent contractor under the FLSA. According to the DOL, the purpose of the 2024 rule is to “provide guidance on proper classification and seeks to combat employee misclassification, a serious problem that impacts workers’ rights to minimum wage and overtime pay, facilitates wage theft, allows some employers to undercut their law-abiding competition, and hurts the economy at-large.” In other words, employers must follow the DOL’s final rule framework when determining worker classifications so that employers provide, and workers receive, the legal obligations owed to them.

The final rule also permits employers to consider additional factors that relate to the dependence and independence when determining the proper classification of a worker. Under the final rule’s framework, a single factor does not determine the classification, and employers must consider each factor and all information when determining the classification of a worker.

The first factor employers must consider is the “opportunity for profit or loss depending on managerial skill” of the worker. There are several facts that can be relevant to determine if this factor weighs in favor of employee or independent contractor classification, such as whether the worker:

1. Can determine or negotiate pay.

2. Chooses to accept or decline tasks or chooses the order or time the job is performed.

3. Attempts to expand their business or secure more work.

4. Makes hiring decisions.

5. Makes decisions on purchasing materials and equipment, and/or rent spaces.

The second factor is “investments by the worker and the potential employer.” If the investment supports a business-like function, this factor will weigh in favor of classifying the worker as an independent contractor. Examples of investments include “increasing the worker’s ability to do different types of or more work, reducing costs, or extending market research.” Additionally, if the worker makes investments similar to the potential employer, even if the scale is smaller, this factor likely points to the worker being an independent contractor.

The third factor is the “degree of permanence of the work relationship.” If the work is indefinite, continuous, or exclusive in nature, this factor will weigh in favor of the worker being classified as an employee. The DOL clarifies in the rule that seasonal or temporary work, which is a portion of the jobs in the agricultural workforce, does not by itself indicate that a worker should be classified as an independent contractor.

The fourth factor is the “nature and degree of control” the employer exercises over the worker. There are several facts that can be relevant to determine if this factor weighs in favor of employee or independent contractor classification, such as whether the employer sets the worker’s schedule, supervises or disciplines the worker, controls the prices or rates for the worker’s services or products the worker provides, and limits the worker’s ability to work for others.

The fifth factor is the “extent to which the work performed is an integral part of the potential employer’s business.” If the function the worker performs is an integral part of the business, this factor weighs in favor of classifying the worker as an employee. The DOL provided an example of how this factor applies: “A large farm grows tomatoes that it sells to distributors. The farm pays workers to pick the tomatoes during the harvest season. Because a necessary part of the tomato farm is picking the tomatoes, the tomato pickers are integral to the company’s business. These facts indicate employee status under the integral factor.”

The last factor is “skill and initiative.” If the worker depends on the potential employer to provide training and/or does not use a specialized skill, this factor points to the worker being classified as an employee. Although employees and independent contractors can use a specialized skill, if the specialized skill is used in a business-like manner, the worker is likely an independent contractor.

The final rule went into effect March 11, 2024.

Looking Forward

Overall, the DOL’s 2024 final rule requires employers to use the six-factor framework to properly classify workers as employees or independent contractors. Currently, there is at least one legal challenge to DOL’s 2024 rule (Warren v. U.S. Dep’t of Labor, 2:24-cv-00007, N.D. Ga.). Nevertheless, the worker classification test established under the final rule was set to take effect March 11, 2024, where employers will be expected to classify workers under these new guidelines. Employers that misclassify workers may be required to pay unpaid wages owed to the employee, civil money penalties, and/or attorneys’ fees associated with litigation.


This article is provided by the National Agricultural Law Center.

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