The U.S. Department of Labor (DOL) has introduced a new rule under the Fair Labor Standards Act (FLSA) set to take effect on March 11, 2024. This rule could potentially lead to significant changes in how contract workers are classified, with potential implications for employers regarding benefits, insurance coverage, and exposure to employment-related lawsuits.
The New Rule
The Employee or Independent Contractor Classification Under the Fair Labor Standards Act rule, which replaces a rule established during the Trump Administration, aims to provide a clearer analysis for employers to determine a worker’s employment status. It re-adopts an enhanced economic realities test for worker classification that was previously in effect under an Obama administration rule. The new rule introduces a six-factor test to guide employers in determining a worker’s employment status under the FLSA, as opposed to the two-factor test under the Trump administration.
The six factors in determining worker status under the new rule include the following:
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and potential employer
- Degree of permanence of the work relationship
- Nature and degree of control
- Extent to which work performed is an integral part of the business
- Skill and initiative
Concerns With The New Rule
Employers have expressed concerns about the broader impact of the new rule, fearing that it may have consequences beyond just minimum wage and overtime pay protections. While the DOL insists that the change is tailored and limited, some experts and industry professionals believe otherwise.
In addition, the change in worker classification may have significant implications for various industries, particularly the construction sector. However, the National Electrical Contractors Association has expressed support for the new rule, citing its potential to address the widespread misclassification of workers across industries.
The new rule faces court challenges, with concerns raised about potential confusion arising from workers being classified differently under various statutes and across different states. This confusion could lead to increased employment-related litigation, as highlighted by pending lawsuits challenging the rule.
Implications For Workers And Employers
While some labor unions and advocates support the reclassification of workers as employees for wage and hour purposes, certain groups, such as app-based gig workers and business advocates, are concerned about the potential loss of opportunities and flexibility if gig workers were to be classified as employees.
In addition, the new rule may prompt employers to rethink their insurance coverage. This could lead to more confusion about the coverage of certain claims and the need for additional insurance, such as employment practices liability insurance (EPLI) or directors and officers (D&O) liability insurance.
How A PEO Can Help
In light of the changes stemming from the DOL’s new rule on employee classification, businesses may find value in seeking the support of a professional employer organization (PEO) like Group Management Services (GMS). PEOs offer expertise in navigating complex employment regulations, providing guidance on worker classification, and assisting in the management of benefits and insurance coverage. Through a partnership with GMS, businesses can proactively address the challenges posed by the new rule, ensuring compliance while maintaining their focus on core business operations. As the regulatory landscape continues to evolve, leveraging the resources and expertise of a PEO can empower businesses to adapt effectively and thrive in the face of changing employment practices and legal requirements. If you’re interested in learning more about what a partnership looks like with GMS, contact us today.