Skip to content

New regulations on “employee” and “independent contractor” classification

20 JANUARY 2024 | Ezequiel Roitman

The U.S. Department of Labor modified wage and hour regulations to replace its criteria for determining employee or independent contractor classification under the Fair Labor Standards Act. These changes most likely impact you if you hire independent contractors

On January 9, 2024, the U.S. Department of Labor (DOL) made a significant announcement regarding the determination of workers’ classifications as employees or independent contractors under the federal Fair Labor Standards Act (FLSA) . An employee working in a foreign country is not protected by the FLSA, even if the employer has its main office in the United States.

The final rule relating to this pivotal development, set to come into effect on March 11, 2024, supersedes the 2021 independent contractor rule with a focus on the core factors of the relationship (also called the “core-factors test”). In its stead, the DOL has introduced a comprehensive “six-factor test” designed to assess the employment relationship, returning to the totality of circumstances analysis and what the DOL calls a “(…) return to the economic reality of the whole activity (…)”.

The new test encompasses a detailed evaluation considering: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss depending on their managerial skill; (3) the extent of the relative investments of the employer and the worker; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. Additional factors may be relevant in determining whether the worker is an employee or independent contractor, if the factors in some way indicate whether the worker is in business for himself, as opposed to being economically dependent on the potential employer for work.

In contrast to the new rule, in the 2021 rule, only five economic reality factors determined a worker´s status, of which three were considered “non-core factors” – amount of skill, permanence of the working relationship, and integration of work – and two were considered “core factors” – nature and degree of control over the work and the worker’s opportunity for profit or loss. The 2021 rule provided that it was highly unlikely that the three non-core factors combined could outweigh the combined value of the core factors. In the new rule, on the other hand, the new six-factor test should guide an assessment of the economic realities of the working relationship, but no one factor or subset of factors is necessarily dispositive.

The DOL believes that this final rule reflects years of case law, and will provide more consistent guidance to employers as they determine whether workers are economically dependent on the employer for work or are in business for themselves, as well as useful guidance to workers on whether they are correctly classified as employees or independent contractors. The DOL’s goal is to provide guidance to help protect employees from misclassification.

The rule is clearly more favorable from a worker’s perspective than the 2021 rule sanctioned during the Trump administration, and might lead to a number of independent contractors requesting a change in their status to employees. This may even occur in certain industries, such as the technology industry, where companies regularly hire workers as independent contractors. Under the new six-factor test, many of these workers may be deemed employees.

Latin American founders should review the relationships they have with “independent contractors” working in the United States, and consult with US legal counsel about the impact this new regulation may have on their company.
At PAG Law, we specialize in providing expert legal counsel to entities of all sizes. Our seasoned team is here to ensure that you not only understand this new regulation but also navigate it smoothly so your business can continue to thrive. Please contact the author or any other member of the corporate team at PAG Law for more information and a specific analysis of how this regulation might affect your company.

New regulations on “employee” and “independent contractor” classification

#image_title

20 JANUARY 2024 | Ezequiel Roitman

The U.S. Department of Labor modified wage and hour regulations to replace its criteria for determining employee or independent contractor classification under the Fair Labor Standards Act. These changes most likely impact you if you hire independent contractors

On January 9, 2024, the U.S. Department of Labor (DOL) made a significant announcement regarding the determination of workers’ classifications as employees or independent contractors under the federal Fair Labor Standards Act (FLSA) . An employee working in a foreign country is not protected by the FLSA, even if the employer has its main office in the United States.

The final rule relating to this pivotal development, set to come into effect on March 11, 2024, supersedes the 2021 independent contractor rule with a focus on the core factors of the relationship (also called the “core-factors test”). In its stead, the DOL has introduced a comprehensive “six-factor test” designed to assess the employment relationship, returning to the totality of circumstances analysis and what the DOL calls a “(…) return to the economic reality of the whole activity (…)”.

The new test encompasses a detailed evaluation considering: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss depending on their managerial skill; (3) the extent of the relative investments of the employer and the worker; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. Additional factors may be relevant in determining whether the worker is an employee or independent contractor, if the factors in some way indicate whether the worker is in business for himself, as opposed to being economically dependent on the potential employer for work.

In contrast to the new rule, in the 2021 rule, only five economic reality factors determined a worker´s status, of which three were considered “non-core factors” – amount of skill, permanence of the working relationship, and integration of work – and two were considered “core factors” – nature and degree of control over the work and the worker’s opportunity for profit or loss. The 2021 rule provided that it was highly unlikely that the three non-core factors combined could outweigh the combined value of the core factors. In the new rule, on the other hand, the new six-factor test should guide an assessment of the economic realities of the working relationship, but no one factor or subset of factors is necessarily dispositive.

The DOL believes that this final rule reflects years of case law, and will provide more consistent guidance to employers as they determine whether workers are economically dependent on the employer for work or are in business for themselves, as well as useful guidance to workers on whether they are correctly classified as employees or independent contractors. The DOL’s goal is to provide guidance to help protect employees from misclassification.

The rule is clearly more favorable from a worker’s perspective than the 2021 rule sanctioned during the Trump administration, and might lead to a number of independent contractors requesting a change in their status to employees. This may even occur in certain industries, such as the technology industry, where companies regularly hire workers as independent contractors. Under the new six-factor test, many of these workers may be deemed employees.

Latin American founders should review the relationships they have with “independent contractors” working in the United States, and consult with US legal counsel about the impact this new regulation may have on their company.
At PAG Law, we specialize in providing expert legal counsel to entities of all sizes. Our seasoned team is here to ensure that you not only understand this new regulation but also navigate it smoothly so your business can continue to thrive. Please contact the author or any other member of the corporate team at PAG Law for more information and a specific analysis of how this regulation might affect your company.

New regulations on “employee” and “independent contractor” classification

#image_title

20 JANUARY 2024 | Ezequiel Roitman

The U.S. Department of Labor modified wage and hour regulations to replace its criteria for determining employee or independent contractor classification under the Fair Labor Standards Act. These changes most likely impact you if you hire independent contractors

On January 9, 2024, the U.S. Department of Labor (DOL) made a significant announcement regarding the determination of workers’ classifications as employees or independent contractors under the federal Fair Labor Standards Act (FLSA) . An employee working in a foreign country is not protected by the FLSA, even if the employer has its main office in the United States.

The final rule relating to this pivotal development, set to come into effect on March 11, 2024, supersedes the 2021 independent contractor rule with a focus on the core factors of the relationship (also called the “core-factors test”). In its stead, the DOL has introduced a comprehensive “six-factor test” designed to assess the employment relationship, returning to the totality of circumstances analysis and what the DOL calls a “(…) return to the economic reality of the whole activity (…)”.

The new test encompasses a detailed evaluation considering: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss depending on their managerial skill; (3) the extent of the relative investments of the employer and the worker; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. Additional factors may be relevant in determining whether the worker is an employee or independent contractor, if the factors in some way indicate whether the worker is in business for himself, as opposed to being economically dependent on the potential employer for work.

In contrast to the new rule, in the 2021 rule, only five economic reality factors determined a worker´s status, of which three were considered “non-core factors” – amount of skill, permanence of the working relationship, and integration of work – and two were considered “core factors” – nature and degree of control over the work and the worker’s opportunity for profit or loss. The 2021 rule provided that it was highly unlikely that the three non-core factors combined could outweigh the combined value of the core factors. In the new rule, on the other hand, the new six-factor test should guide an assessment of the economic realities of the working relationship, but no one factor or subset of factors is necessarily dispositive.

The DOL believes that this final rule reflects years of case law, and will provide more consistent guidance to employers as they determine whether workers are economically dependent on the employer for work or are in business for themselves, as well as useful guidance to workers on whether they are correctly classified as employees or independent contractors. The DOL’s goal is to provide guidance to help protect employees from misclassification.

The rule is clearly more favorable from a worker’s perspective than the 2021 rule sanctioned during the Trump administration, and might lead to a number of independent contractors requesting a change in their status to employees. This may even occur in certain industries, such as the technology industry, where companies regularly hire workers as independent contractors. Under the new six-factor test, many of these workers may be deemed employees.

Latin American founders should review the relationships they have with “independent contractors” working in the United States, and consult with US legal counsel about the impact this new regulation may have on their company.
At PAG Law, we specialize in providing expert legal counsel to entities of all sizes. Our seasoned team is here to ensure that you not only understand this new regulation but also navigate it smoothly so your business can continue to thrive. Please contact the author or any other member of the corporate team at PAG Law for more information and a specific analysis of how this regulation might affect your company.