Background on Independent Contractor Classification Rules

On January 6, 2021, the United States Department of Labor (U.S. DOL) issued a ruling dubbed “The Final Rule” with the intention of clarifying the classification of independent contractors (“1099s) versus employees (W-2s) under the Fair Labor Standards Act (FLSA). When we commented on the ruling in our blog “News You Need to Know: Important 2021 Compliance Updates on Contingent Workers” we mentioned how the ruling may not actually go into effect based on the change in administration and the different priorities that it brought to the table. Originally slated to go into effect on March 8, 2021, the Biden administration delayed, and then withdrew the Final Rule, and the subject was dropped.

But this was not the final word on the subject.

On March 14, 2022, the US District Court of Eastern Texas reinstated the Final Rule, finding that the administration did not follow proper procedure when it withdrew the Find Rule and reinstated it with a retroactive date of March 8, 2021.

What Does it Mean for Independent Contractors?

The Final Rule was an attempt to standardize the criteria when determining if a worker is an independent contractor or an employee and to clear up some inconsistencies between industries and states. The Final Rule was comprised of 6 fact-specific examples that applied the factors, including one using a business that operates similar to the Uber and Lyft model. Under this rule there are 2 central factors in the determination of an independent contractor, as we stated in our compliance update last year:

  1. The nature and degree of control over the work

  2. The worker's opportunity for profit or loss based on initiative and investment

Additional guideposts given within the document include:

  • The amount of skill required for the work

  • The degree of permanence of the working relationship between the worker and the potential employer

  • Whether the work is part of an integrated unit of production

Contractor Classification in the Future

Since the Final Rule is now retroactively reinstated, this means that any classifications made between March 8 of 2021 and March 14 of 2022 will need to be re-examined under the FLSA. This ruling has a wide range of implications from protections under the FSLA (Fair Labor Standards Act), FMLA (Family and Medical Leave Act) to ALE (Applicable Large Employer) standards for the Affordable Cares Act (ACA). We strongly recommend that you seek out the advice of a lawyer and CPA to effectively determine where your business stands with the reinstatement of the Final Rule. If you would like to read more from our original analysis of the Final Rule, you can find it in our blog here or a webinar replay we held at the time.