A new rule recently proposed by the U.S. Department of Labor (DOL) could bring major changes for independent contractors and the employers that utilize them.
Under the proposed rule, which was first published in October 2022, employers would likely need to reclassify at least some of their independent contractors as employees. Citing persisting concerns around misclassification, the DOL says the rule change would provide greater wage and benefit protection for workers.
The rule change would come at a time when a growing number of Americans are turning to contract work. In 2021, freelancers made up 36 percent of the U.S. workforce, contributing $1.3 trillion to the economy in annual earnings. We can expect these numbers to continue to climb as more employees seek flexible work arrangements that don’t require fixed office hours and, in many cases, translate to higher earning potential.
While many people tend to associate freelancers with the gig economy and companies like Uber, Lyft, Instacart, and DoorDash, the reality is that businesses in all industries utilize these types of workers. A 2019 survey of U.S. workers found that the most common type of freelance work is skilled services, with 45 percent of freelancers providing services such as programming, marketing, and consulting. Arts and design, entertainment, construction, architecture/engineering, computers/mathematics, and transportation were among the top occupations for workers who identified as freelancers.
What this means, in short, is that any changes pertaining to independent contractors are sure to affect a broad range of roles across a variety of industries.
In a press release, the DOL specified that the rule would do the following:
- Align the department’s approach with the courts’ Fair Labor Standards Act (FLSA) interpretation and the economic reality test.
- Restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA.
- Ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
- Revert to the longstanding interpretation of the economic reality factors. These factors include the investment, control, and opportunity for profit or loss factors. The integral factor, which considers whether the work is integral to the employer’s business, is also included.
- Assist with the proper classification of employees and independent contractors under the FLSA.
- Rescind the 2021 Independent Contractor Rule.
This new proposed DOL regulation has a long way to go before possibly becoming effective. However, businesses—particularly those that rely heavily on independent contractors—are already thinking ahead to how they might navigate its impacts. More companies may seek out an employer of record to ensure their compliance with any new regulations and to offload some of the costs and administrative tasks that are sure to accompany them.
An employer of record (EoR) is a third-party partner that assumes responsibility for all liabilities associated with a client’s contingent workforce, as well as the payrolling, taxes, unemployment insurances, workers’ compensation expenses, and employer benefits that can weigh heavily on internal budgets. An EoR will also handle all employee classification responsibilities, absorb all relationship management and clerical duties, and protect businesses from sensitive co-employment issues.
In many cases, EoR services are just one piece of a more comprehensive partnership. A master vendor solution includes the full management of a business’s contingent workforce.
Even in the absence of major changes to labor laws and regulations, managing contingent workers efficiently and effectively—and at a price point that’s not breaking your bottom line—can certainly be a challenge. Acara works with clients of all types and sizes to implement custom, compliant workforce solutions that meet your needs, no matter how big or small.
This blog was authored by Acara Regional Director of Business Development Damian Scandiffio.