If you manage an hourly, distributed workforce, you are likely already aware of the complications that come with employee classification. More specifically, you have already encountered the situation of having to label certain employees as either full-time workers who are subject to employment laws and company rules… or as independent contractors with entirely different terms of engagement.
This long-standing issue has become even more complicated due to the conflicting nature of countless federal employment statutes and state laws, all of which contain their own requirements concerning the definition between “employee” and “independent contractor”.
Businesses are understandably concerned about the legal implications and costly consequences of misclassifying—especially when it comes to laws like the Fair Labor Standard Act (FLSA) and requirements under the DOL’s Wage-Hour Division. That said, the DOL has recently proposed potential formulas, to be codified, for defining employee versus independent contractor under the FLSA.
As we will discuss, however, interpretations are not a perfect solution and do not give license to classify all workers as contractors. Let’s break down the proposal in greater detail and discuss how it could affect your classification process in the future.
Classification Under the DOL’s Latest Proposal
The DOL’s proposal still involves a multi-factor test, namely the “economic realities” test. The DOL’s proposal elevates two “core factors” from this test above all others in defining contractors:
- The nature and degree of an individual’s control over the work; and
- The individual’s opportunity for profit or loss.
According to the DOL, if these two factors do not point to the same classification conclusively, there are three “other factors” to help determine classification. These include:
- The amount of skill required for the work;
- The degree of permanence of the working relationship between the individual and the potential employer; and
- Whether the work is part of an integrated unit of production.
As previously mentioned, the DOL’s proposal doesn’t provide absolute clarity on defining a worker’s status under the FLSA. Conflicting definitions for ‘employee’ and ‘contractor’ will continue to exist under other federal and state-level statutes even if this proposal does become a law. Some state overtime and wage-hour laws that use the ABC classification test will also remain unaffected by the DOL’s proposal.
For these reasons, consider safeguarding with HR Consulting Services when determining your business’s individual classification process and compliance approach.
Additional Guidance from the Proposal
In addition to the aforementioned classification process, the proposal contains guidance on determining whether you, as the employer, can engage in certain operational practices to enhance the safety of all members of your workforce without influencing the status of an employee’s workforce classification. The DOL concluded that, in most cases, your actions do not render an individual more or less likely to be an employee.
The proposal also expressed the need to limit reliance on defining the extent to which a worker’s services are central to your business functions as a means of classifying them as a contractor or employee. Instead, the DOL explains that a worker is more likely to be a contractor when their work is ‘segregable’ from your operation. The DOL stresses that “the actual practice of the parties involved is more important than what may be contractually or theoretically possible.”
Don’t Handle Classification Compliance Alone
At EPAY Systems, we offer a flexible Human Capital Management System that’s built to handle even the toughest hourly workforce challenges. Our team tackles each new compliance challenge and evolving law alongside yours, so you never feel uncertain in the face of federal or state-level changes.
To defend your business against potential classification lawsuits, you need to ensure your company’s policies and actions are following the latest regulatory requirements. We offer a customizable solution that helps track all sorts of employees (including contractors) while avoiding misclassification, payroll and tax filing mistakes, and the HR management risks that often accompany overseeing individuals in multiple states.
Looking for more help? Check out our blog, “Best Practices for Classifying Employees Correctly” or request a demo of our HR and Payroll solution today.