New Employee Classifications Could Change How You Categorize Staff

Many businesses rely on independent contractors in their models. An independent contractor is a self-employed individual or entity contracted to provide services for or perform work for another entity as a nonemployee.

Because they’re self-employed, they are taxed differently. And many kinds of independent contractors, including painters, mechanics, veterinarians, etc., could also be considered full-time employees if classified differently. 

This is important to know because in January, the U.S. The Department of Labor (DOL) issued a final rule that shifts how worker classification is approached under the Fair Labor Standards Act (FLSA). 

Understanding the DOL’s Final Rule

The essence of the DOL’s final rule is to implement a tougher analysis for worker classification. This means that more individuals who were previously classified as independent contractors may now fall under the category of employees. 

The DOL’s final rule applies six economic reality factors to analyze employee or independent contractor status under the FLSA. 

  1. The opportunity for profit or loss, depending on managerial skill
  2. Investments by the worker and the potential employer
  3. The degree of permanence of the work relationship
  4. The nature and degree of control
  5. The extent to which the work performed is an integral part of the potential employer’s business
  6. The worker’s skill and initiative

HR professionals must now review and potentially revise their existing classification processes. There is no one rule that carries more weight than another. It’s essential to ensure that each worker is accurately classified as either an employee or an independent contractor based on the updated criteria set forth by the DOL.

The final rule only revises the worker classification analysis under the FLSA. It does not apply to other laws—federal, state or local—that use different standards for worker classification. 

Weighing the Six Factors

Opportunity for Profit or Loss: Evaluate whether the worker has the opportunity to earn profits or incur losses based on their managerial skills, investment in equipment or materials, or ability to perform additional work for other clients. This factor assesses the degree of economic independence and risk-taking inherent in the worker’s role.

Investment by the Worker or Employers: Consider whether the worker has made significant investments in tools, equipment, or facilities necessary to perform the job. This factor weighs the level of financial commitment and risk assumed by the worker in their capacity as an independent contractor.

Permanency of the Relationship: Evaluate the duration and stability of the working relationship between the employer and the worker. Determine whether the arrangement is intended to be temporary or ongoing, and whether there are provisions for termination or renewal of the contract.

Nature and Degree of Control: This factor examines the extent to which the employer controls how the worker performs their job duties. Analyze whether the employer dictates the work schedule, provides instructions on how tasks should be completed, or exercises significant oversight over the worker’s activities.

Integration of the Worker’s Services: Assess the degree to which the worker’s services are integral to the employer’s business operations. Consider whether the worker’s role is essential to the core functions of the business or whether their services are ancillary or supplemental in nature.

Skill and Initiative Required: Examine the level of skill, expertise, and entrepreneurial initiative required to perform the job. Assess whether the worker’s specialized knowledge or ability to exercise independent judgment significantly impacts the outcome of their work.

Addressing Other Related Issues and Concerns

Manage Benefits

With more workers being classified as employees, HR departments will need to adjust benefit offerings accordingly. This may include providing access to healthcare benefits, retirement plans, paid time off, and other perks reserved for employees.

Ensure that benefit packages comply with applicable regulations and align with the needs and expectations of both the organization and its workforce.

Stay abreast of all regulatory updates and changes related to worker classification and FLSA compliance. This includes not only federal regulations but also state-specific laws that may have additional requirements.

Compliance and Regulatory Requirements

Regularly audit classification practices to ensure compliance and mitigate the risk of costly penalties or legal disputes.

Effective Management of Independent Contractor Relationships

Despite the shift towards classifying more workers as employees, independent contractor relationships remain prevalent in many industries.

HR professionals should establish clear contracts outlining the terms of engagement for independent contractors, including deliverables, payment terms, and the scope of work.

Maintain open communication channels with independent contractors to foster positive working relationships and address any concerns or issues promptly.

Tips for HR Professionals

There are some final ways you can navigate this new rule. 

Invest in ongoing training and development for HR staff to ensure they have the knowledge and skills necessary to accurately classify workers and navigate regulatory requirements.

Leverage technology solutions, such as HR management systems and compliance software, to streamline classification processes and ensure data accuracy.

Foster collaboration between HR, legal, and finance departments to ensure alignment on classification decisions and compliance measures.

Seek guidance from legal experts or consultants specializing in employment law to address any complex classification issues or compliance concerns.

Remember, staying informed, proactive, and collaborative is key to thriving in the evolving landscape of HR management.