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The rules for independent contractors changed in May when the U.S. Department of Labor issued a Final Rule governing their hire under the Fair Labor Standards Act. What did the new rule do, and how will it affect employers and their independent contractors? 

New Rules for Independent Contractors 

With a new administration in place, the reversal of the January 2021 Final Rule on independent contractor status was somewhat expected. The change went into effect on May 6, 2021, in the Federal Register. The ruling has to do with how we define independent contractors legally under the law. The January ruling stated “the nature and degree of control over the work” itself plus “the worker’s opportunity for profit or loss based on imitative and/or investment” as two critical factors in determining legally if a worker was an independent contractor. The ruling also stated three other criteria for determining this status.  

The U.S. Department of Labor issued a press release stating the change was intended to “preserve essential workers’ rights.” They stated these changes occurred because: 

  • The January ruling conflicted with the Fair Labor Standards Act (FLSA) as well as judicial precedent. 
  • The January ruling undermined the “economic realities test,” undercutting worker statutory protections. 
  • The January ruling narrowed the considerations allowed when legally determining if a worker is an independent contractor. 

But this change, which may seem small, promoted the National Law Review to wonder, “it remains to be seen how the Department will address this issue in the coming months and years.” Where does this leave employers seeking to hire independent contractors?  

Worker Classifications and Your Risk 

The reality is that employers still carry a lot of risks when hiring independent contractors and must carefully determine their approach when hiring this workforce. One lawyer said, “there is still no bright-line rule for weighing the FLSA factors.” Further complicating the issue is the fact that worker classification requirements may be different under the FLSA than your own state law. If you do business in multiple states, things can get messy. Too, the National Labor Relations Act and the Internal Revenue Code all have various rules that you must follow when hiring independent contractors. 

The Society for Human Resource Management (SHRM) says that the Department of Labor isn’t expected to reclarify these rules and that the new President says he supports an ABC test similar to what they use in California. That means, in order for a worker to be designated an independent contractor, the following criteria must be met: 

  • The employee must be free of control and direction from the employer when performing the work. 
  • The employee must perform work outside the usual course of the hiring entity’s business. 
  • The employee is regularly engaged in an independently established line of work of the exact nature of what the employer hired them to do. 

Why does this matter?

Employers that fail to classify their workers properly could face lawsuits and fines and a PR nightmare of epic proportions. That’s where an employee of record (EOR) like FoxHire can help. We carry the legal risk of these complex rules, staying on top of minute labor law changes at the local, state, and federal levels. Talk with our team about how we can keep you on the right side of labor laws. 

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