The Fair Labor Standards Act (FLSA) delineates the classification of workers as either independent contractors or employees, impacting their rights and employer obligations. See 29 U.S.C. § 213.
Independent contractors are individuals or entities contracted to provide specialized services on a project or as-needed basis. Their relationship with employers is usually “arm’s length,” characterized by freedom from control in the day-to-day operations. They usually bear responsibility for their own taxes and are exempt from wage, hour, and employment discrimination laws. The new independent contractor rule, effective March 11th, 2024, includes a six-factor test that reflects a totality of the circumstances economic test.
2021 Rule:
Established two core factors (control over work and opportunity for profit or loss) supplemented by three lesser factors for independent contractor classification. This rule was withdrawn due to its perceived inconsistency with the FLSA.
2024 (new) Rule: 89 FR 1638-01
The new independent contractor rule includes a six-factor test that will return the analysis to a totality of the circumstances. Each factor is given equal weight:
Each factor harbors additional consideration:
Best practices:
Before diving into an independent contractor agreement, it's important for employers to scrutinize it thoroughly. The key concern is to confirm that the individual truly fits the "independent contractor" classification and is not erroneously treated as an employee under the Fair Labor Standards Act (FLSA).
In addition to careful review, several strategies can help employers mitigate the risk of an independent contractor being misclassified:
Payment Structure: Opt for paying on a per-project basis whenever feasible, and have contractors handle their own out-of-pocket expenses.
Tax Responsibilities: Clearly outline in the agreement that the contractor is accountable for their own employment and income taxes.
Explicit Declaration: Make it explicit within the agreement that the worker is an independent contractor and ensure they don't portray themselves as employees.
Project Control: State that the contractor retains the right to control the project, emphasizing their independence.
Benefit Exclusions: Avoid providing additional benefits typically associated with employees.
Equipment Ownership: Arrange for contractors to supply their own equipment and tools necessary for the job.
Project Terms: Define clear terms for project renewal and termination, including the contractor's prerogative to end the relationship.
By adhering to these precautions, employers can bolster their position and minimize the risk of misclassification issues down the road. The best strategy when hiring a contractor is negotiating a contract that gives the contractor the greatest freedom as to the manner and scheduling of the work. The employer should also avoid long-term or exclusive contracts that may make the contractor dependent on the business. The contractor should bear a portion of if not all the risk of loss under the contract, and once the work has commenced, the employer should avoid any ongoing supervision or direction of the work.
One final thought: Employers who hire larger amounts of independent contractors should consider implementing an arbitration agreement to mitigate class or collective liability. Chestnut Cambronne PA has arbitration agreements which can be crafted for any employer to help reduce or eliminate the possibility of a class action or collective liability on behalf of independent contractors.
Should you need assistance as to independent contractor issues, please contact a member of Chestnut Cambronne’s Employment Law or Business Representation practice groups.