On January 10, 2024, the U.S. Department of Labor revised the guidance on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA). 

This final rule replaces a 2021 rule with an analysis for the status that is more consistent with decades of court decisions. 

The Department believes that this final rule will reduce the risk that employees are misclassified as independent contractors, while providing added certainty for businesses that engage (or wish to engage) with individuals who are in business for themselves.

The final rule is scheduled to take effect on March 11, 2024.

It's important to understand that the choice of whether to put someone on as an employee vs. 1099 is not up to the business owner or the worker.

It's up to the federal government.

Outlined below are the six factors the FLSA is looking at when determining whether a worker is an employee or independent contractor.

1. Opportunity for Profit or Loss Depending on Managerial Skill: Assess whether the worker can influence economic success through managerial decisions.

2. Investments by the Worker and the Potential Employer: Examine whether the worker's investments contribute to an independent business operation.

3. Degree of Permanence of the Work Relationship: Determine whether the work arrangement is continuous and exclusive or project-based and non-exclusive.

4. Nature and Degree of Control: Evaluate the extent to which the potential employer controls aspects of the worker's job.

5. Extent to Which the Work Performed is an Integral Part of the Potential Employer's Business: Consider whether the work performed is essential to the core operations of the business.

6. Skill and Initiative: Assess whether the worker's specialized skills contribute to business-like initiative.

Overlooking Factor #5

The area that most small businesses try to get around, but shouldn't, is Factor #5. This is emphasized because of the expansive growth of the gig economy and remote work. “If the work performed by a worker is critical, necessary, or central to the potential employer's principal business, then this factor indicates that the worker is an employee." 

This factor does not depend on whether any individual worker is an integral part of the business, but rather whether the function they perform is an integral part of the business.

Examples

Example 1:  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 a 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.

Example 2: A ride-share company hires drivers to move passengers.  Because the company could not exist without the drivers, this indicates they are integral to the company's business and warrants employee status.

Example 3: An accounting firm hires remote accountants to prepare taxes and do bookkeeping in other states. Because the the work of the accountants is the essential revenue producing work of the firm, this indicates they are integral to the company's business and warrants employee status.

With the March 1st effective date of this revised guidance, it's important to take a closer look at your facts and circumstances.

Contact us if you have any concerns whether you should switch to W-2 employees.

We're here to help.