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Independent Contractor Rule: US classification rules to change in March

Acting Secretary of Labor Julie Su emphasised the rule's dual focus on worker protection and business fairness.
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US DOL’s New Independent Contractor Rule: A Guide for Businesses and Freelancers

The landscape of independent contracting is undergoing a significant shift in the United States. Following the U.S. Department of Labor’s (DOL) announcement in January 2024, businesses, freelancers, and platforms are adapting to the new Independent Contractor Rule, effective 11 March, 2024. This guide explores the key aspects of the rule and its potential impact.

What’s changing about contractor classification in the US?

The new rule revises how employers classify workers as employees or independent contractors under the Fair Labor Standards Act (FLSA). This replaces the 2021 rule with a narrower set of factors, aiming to ensure workers are correctly classified and receive entitled benefits like minimum wage and overtime pay.

Why the Change?

The DOL sought clarity and consistency after the 2021 rule faced criticism for deviating from established legal precedent. The new rule aims to provide a clearer framework and reduce misclassifications, creating a fairer playing field for businesses using independent contractors.

Impact on Workers and Businesses

Acting Secretary of Labor Julie Su emphasised the rule’s dual focus on worker protection and business fairness. For the freelancer economy, platforms like Worksome connecting freelancers with opportunities, the rule has significant implications. It may redefine the dynamics between platforms, freelancers, and businesses, promoting clarity and consistency.

Understanding the “Economic Reality” Test

The core of the new rule is the “economic reality” test, a multi-factor assessment that determines whether a worker is economically dependent on an employer. Worksome recognizes the importance of these factors, including:

  • Opportunity for profit or loss: Can the worker independently control their income and expenses?
  • Investments: Does the worker invest in their own tools and equipment?
  • Degree of permanence: Is the work ongoing or temporary?
  • Nature and degree of control: Does the employer dictate work hours, location, and methods?
  • Integrality of work to the employer’s business: Is the work essential to the employer’s core operations?
  • Worker’s skill and initiative: Does the worker have specialized skills and independent judgment?

This “totality-of-the-circumstances” approach ensures a comprehensive evaluation, avoiding one-size-fits-all solutions.

No more rigid “ABC” Test

Unlike some state laws, the DOL’s rule avoids the rigid “ABC” test, opting for the more flexible “economic reality” test used by courts. This acknowledges the limitations of any single factor.

Rule’s Limited Scope

It’s crucial to remember that this rule specifically revises the DOL’s interpretation under the FLSA. While it impacts independent contractor classification under the FLSA, it doesn’t alter classifications under other laws like the Internal Revenue Code or state wage-and-hour laws. Worksome emphasizes understanding the rule’s boundaries and remaining compliant with all applicable laws.

Adapting to the new rules

With the rule taking effect, businesses, freelancers, and platforms like Worksome, who reported the changes, need to adapt to the new criteria for classifying independent contractors. For example, Worksome’s Worksome Classify service helps businesses navigate these complexities. The company claims the tool’s technology can ensure accurate and compliant categorisation, mitigating misclassification risks.

“At Worksome, our commitment to facilitating transparent and fair engagements between freelancers and businesses remains unwavering,” says Ray Walker, VP of Contingent Workforce Management at Worksome. “As we embrace this new era shaped by the DOL’s Independent Contractor Rule, understanding the intricacies of the rule is not just a necessity; it’s a strategic imperative for the success of our clients in the modern workforce.”

The DOL’s Independent Contractor Rule marks a significant shift in the world of independent work. By understanding the “economic reality” test and adapting to the evolving landscape, businesses and freelancers can navigate this change effectively.

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