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A Guide to the New Independent Contractor Regulations in the US

New Independent Contractor Regulations

The U.S. Department of Labor (DOL) published a final rule on January 9, 2024, redefining the term “independent contractor” for the Fair Labor Standards Act (FLSA). This new regulation significantly differs from prior guidance, including a 2021 rule, and focuses on deciphering the “economic reality” of relationships between potential employers and workers.

The landscape of worker classification in the US has shifted dramatically with the recent finalization of independent contractor regulations by the Department of Labor (DOL). This article aims to demystify these changes, particularly their impact on healthcare workers, and equip you with the knowledge to navigate this evolving terrain.

Defining the Independent Contractor:

An independent contractor, in essence, is someone who provides services to a client but is not considered an employee. They operate their own business, set their own hours, and have control over their work methods. Think freelancers, consultants, and gig workers. In the healthcare industry, these are common independent contractor positions:

  • Physicians and dentists: While some doctors and dentists are employed by hospitals or clinics, many work as independent contractors. They may run their own practice or see patients on a contract basis.
  • Nurse practitioners and physician assistants: These healthcare professionals provide primary care and other medical services to patients. They may work independently or for a healthcare provider.
  • Home healthcare aides and therapists: These individuals provide care and support to patients in their homes. They may work for home healthcare agencies or independently.

Why Does the Definition of Independent Contractor Matter?

The FLSA is responsible for setting federal minimum wage, overtime, and recordkeeping rules, but it only applies to “employees” and not to independent contractors. The correct classification of workers plays a critical role in determining coverage and compliance with federal wage-and-hour law.

A Glimpse into the Regulatory Past

Prior to the new regulations, the 2021 Independent Contractor Rule established a two-pronged test for worker classification. This test, however, faced criticism for favoring businesses over worker protections. Recognizing these concerns, the DOL implemented the current regulations in January 2024.

The Reshaping of the Landscape

The new regulations move away from the 2021 framework and embrace a more comprehensive “economic realities” test. This six-factor test delves deeper into the nature of the work relationship, considering aspects like control over work, economic dependence, and investment in equipment.

What Led to the New Rule?

Previously, the DOL had not defined “independent contractor” by regulation, relying instead on informal guidance, such as Fact Sheet 13, which addressed seven factors relevant to worker classification. In 2020, the department proposed a new five-factor test, and the rule was finalized in January 2021. However, following a change in administration, the rule was delayed, challenged in court, and eventually accepted as still in effect. In response, the DOL proposed a new six-factor test in October 2022 to replace the 2021 rule.

Overview of the Six-Factor Test

The new test adopted by the final rule consists of the following six factors:

  • The worker’s opportunity for profit or loss
  • Investments made by the worker and potential employer
  • The degree of permanence of the relationship
  • The nature and degree of the potential employer’s control over the work
  • The extent to which the work is integral to the potential employer’s business
  • The worker’s skill or initiative
  • The rule uses a “totality of the circumstances” approach, acknowledging that other factors may be relevant in specific cases.

Key Changes in the Final Rule

The final rule closely follows the proposed rule, with some adjustments. The most significant change relates to factor four, the “nature and degree of control.” The final rule now explains that businesses can take steps to comply with specific legal requirements without affecting the worker’s classification. However, any control beyond these legal requirements would impact the analysis.

Other refined factors in the final rule include clarifying the relative investments between the worker and potential employer, the treatment of tools and equipment, distinctions regarding earning more through entrepreneurship, and the application of specialized skills.

Implications for Employers

As the legal battle over the 2021 rule and withdrawal continues, it’s crucial for employers to study the new rule carefully. The final rule differs significantly from previous guidance, and DOL investigators may treat it as the controlling standard for audits and compliance actions.

Employers should review the new final rule and evaluate their classification policies and practices accordingly. When in doubt, they should consult experienced legal counsel.

Impact on Healthcare Workers:

The healthcare industry relies heavily on independent contractors, from nurses and therapists to home health aides and lab technicians. The new regulations could potentially reclassify some of these workers as employees, granting them access to minimum wage, overtime pay, and other employee benefits. This shift could have significant implications for both workers and healthcare providers.

Compliance in the New Era:

To ensure compliance with the new regulations, businesses in the healthcare sector should:

  • Conduct a thorough review of their workforce: Analyze the nature of work performed by independent contractors under the six-factor test.
  • Seek legal counsel: Consult with employment law experts to understand the specific implications of the regulations for their business.
  • Implement clear work agreements: Clearly define the scope of work, payment terms, and level of control in contracts with independent contractors.
  • Stay informed: Keep abreast of any future updates or clarifications to the regulations by the DOL.

The Road Ahead:

The finalization of these regulations marks a significant turning point in worker classification in the US. While the full impact on the healthcare industry remains to be seen, staying informed and adapting to the changing landscape is crucial for both businesses and healthcare workers. Remember, navigating this maze requires careful consideration and proactive measures to ensure compliance and protect worker rights.

Additional Resources:

By understanding the intricacies of the new regulations and taking proactive steps, healthcare providers and independent contractors alike can navigate this evolving landscape with confidence.