New independent contractor rule signals a busy year for compliance

The U.S. Department of Labor recently announced a final rule that aims to clarify when a worker qualifies as an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The long-awaited rule kicks off a year in which legal experts expect HR leaders to increasingly focus on compliance issues.

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According to a DOL press release, the new rule, which became effective Jan. 11, “provides guidance on proper classification and seeks to combat employee misclassification,” which the DOL says can impact workers’ right to minimum wage and overtime pay, as well as facilitate wage theft and harm competition.

Misclassifying employees as independent contractors “is a serious issue that deprives workers of basic rights and protections,” explained Acting Secretary of Labor Julie Su in the release. “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.”

The rule separately rescinds the 2021 Independent Contractor Rule that the department says is not consistent with the law and longstanding judicial precedent.

HR’s compliance mandate

According to Ted Hollis, an employment law partner at Quarles & Brady, employers can prepare to comply with the DOL’s new rule for classifying workers as employees or independent contractors by reviewing their current independent contractor relationships (and prospective ones) through the lens of the six key elements (included in an online DOL FAQ) of the DOL’s economic realities test.

Ted Hollis, Quarles & Brady
Ted Hollis, Quarles & Brady

“Employers must keep in mind that no single factor is more important than the others and that different factors might be more or less important depending on the facts of each individual situation,” Hollis explains.

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Moreover, he adds that the six elements are not exclusive, and additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA. Ultimately, it comes down to evaluating whether the worker is in business for themselves or economically dependent on the potential employer for work.

Finally, Hollis says, it’s important to remember that the DOL’s new test is specific to the FLSA; different tests may be applied by other federal and state agencies and courts under different federal or state laws.

“Nevertheless, digging deeper into the DOL’s six listed factors is a good starting point to evaluate worker classification decisions,” Hollis says.

A complex landscape for compliance

The new independent contractor rule is just one of many focus areas facing HR this year in the increasingly complex landscape of compliance.

“Compliance. It’s probably not your favorite topic if you’re an HR professional, but the speed of statutory and regulatory changes—combined with an increasingly mobile workforce and hyper-localization of requirements—is negatively impacting even the most well-prepared organizations,” according to a LinkedIn post from Mark Stelzner, founder/managing principal at HR consulting firm IA and chair of HRE’s upcoming EPIC Conference, April 24-26 in Las Vegas. “I get to speak with CPOs/CHROs every single day, and I will tell you that this is an incredibly high area of concern and renewed focus.”

In a recent HRE webinar, Paola Cecchi-Dimeglio, chair of the executive leadership research initiative for women and minority attorneys at Harvard Law School, pointed to new local and state laws expanding the definition of workplace discrimination, enhancing paid family leave and limiting salary history inquiries. Such regulations, she says, may lead to increased interest from local and state legislative bodies across the nation.

“Employers have to be more diligent and more able to navigate a complex landscape,” Cecchi-Dimeglio says.

Meanwhile, the potential regulation of artificial intelligence—fueled by this fall’s wide-ranging executive order on the development and use of AI in the U.S.—is also a looming question mark for HR leaders.

Beatrice Runyan, Vensure Employer Solutions
Beatrice Runyan, Vensure Employer Solutions

To build a culture of compliance in HR as well as throughout an entire organization, it’s important first to hire the right people—those who are already mindful of compliance requirements, says Beatrice Runyan, assistant vice president, compliance, at Vensure Employer Solutions.

“Organizations should also perform regularly scheduled audits to identify any gaps or items that may need to be updated,” she says. It’s critical for employers to update employee handbooks, as well as ensure employee policies reflect any changes to local, state and federal laws and regulations.

HR should also provide continuous training on compliance-related issues and strive to foster psychological safety among the workforce. Runyan says this can “create an environment where employees feel comfortable speaking up if they perceive an issue.”

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Tom Starner
Tom Starner is a freelance writer based in Philadelphia who has been covering the human resource space and all of its component processes for over two decades. He can be reached at [email protected].