Incoming US labor law changes: Employees or contractors, what HR needs to know

In early January 2024, US President Joe Biden’s Department of Labor announced a revision to who classifies an employee (compared to an independent contractors) under the Fair Labor Standards Act.

Why does this matter? Well, a worker’s classification determines what types of benefits and protections they are entitled to – for instance, minimum wage, overtime pay, or social security protections.

So, any misclassification “deprives workers of basic rights and protections”, explained Acting Secretary of Labor, Julie Su.

According to data from the Economic Policy Institute, people who are misclassified as independent contractors earnt as much as a whopping $16,700 less a year in income and benefits than they would have as an employee.

Su continued: “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.”

This new Biden-era rule replaces another rule introduced right at the end of Donald Trump’s presidency.

In the view of Biden’s Department of Labor, the new rule therefore introduces an “analysis for determining employee or independent contractor status that is more consistent with the Fair Labor Standards Act](FLSA) as interpreted by longstanding judicial precedent”.

The Department of Labor also claims that the new rule restores the multi-factor analysis that had previously been in use for decades.

The previous, Trump-era rule only had two criteria – how much control a company has over its workers, and how much ‘entrepreneurial’ companies provide – but this has been changed to six factors.

These are used to determine “whether the work is economically dependent on the employer for work” (and thereby an employee).

Or if the employee “is in business for themself” (ie an independent contractor), Michael Manoukian, Hopkins & Carley attorney tells UNLEASH.

The six factors are as follows:

• Opportunity for profit or loss depending on skill
• Investments by the worker and potential employer
• Degree of permanence in the work relationship
• Nature and degree of control
• Extent to which the work performance is a core part of the potential employer’s business
• Skill and initiative

Here at UNLEASH, our job is to help HR leaders thrive in their jobs.

So, with the help of legal and HR experts (including Manoukian) we explored how big a regulatory change this is, and what actions US HR departments need to take in advance of this rule coming into effect on March 11.

HR, keep data and compliance top of mind

Emily Rose McRae, senior director analyst at Gartner, kicks off the discussion by declaring this regulatory change “represents a significant challenge for HR and business leaders”.

Not least because it could incur higher labor costs; Jitjatjo CEO and co-founder Tim Chatfield thinks “companies should prepare to incur on-costs of 20% to 25% over what minimum wage is”.

Chatfield adds that the wider economy needs to be aware that there may be a “trickle-down effect” on the cost of goods and services.

To help prepare, budgeting is key, but Chatfield and McRae also notes that HR leaders need to conduct a risk assessment.

For McRae, it is crucial that this is done in collaboration with legal and compliance teams.

The next step is to “identify which workers would need to be reclassified and under which department, for example within the finance or legal department, their contacts sit”, explains McRae.

To do this properly will involve HR teams collecting even more data to help them “evaluate individual workers circumstances, and here leaders might need to consider whether to bolster their own HR teams, or deploy new technologies to deal with a huge influx of data processing”.

All of this feeds into those higher costs, as does the spike in “training needs” for reclassified workers.

Training is also important for the whole business, according to The New Workforce CEO and co-founder Kraig Kleeman.

“It’s super important that both the bosses and the team understand all these changes – you want everyone to understand what’s what.”

Kleeman agrees the labor rule change in the US is “big news”, it is a “significant turning point for companies, especially in sectors traditionally dominated by independent contractors” – whether that’s truckers, beauticians, taxi drivers, home health aides or security guards.

This change isn’t just a policy update; it’s a call to adapt and innovate the way we view and manage our workforce,” adds Kleeman.

The US vs the rest of the world on labor

Of course, the US is not the only country to be grappling with the employees vs contractors conundrum.

Back in 2021, the UK supreme court ruled that Uber drivers were not self-employed ‘partners’, but in fact employees – this was due to the dependency of the working relationship.

So, how does the US rule change measure up against the UK and elsewhere in Europe? Hopkins & Carley’s Manoukian notes that there are similarities between the US and Europe – however, it is the differences that create challenges for HR and business leaders.

Companies operating globally need to continue to make sure they review the specific laws in each country where they employ people – there isn’t even consistency across the European Union.

McRae notes: “The perceived benefits and collective influence of gig workers groups will become determining factors in the global adoption of similar legislative frameworks.

“The journey towards reshaping the employment landscape is not only a domestic narrative, but intertwined with the diverse threads of global labor practices.”

Getting political in the US

Of course, it is important to remember there is a political element to this new US labor rule.

While there is a need to ensure you’re complying come March 11 when it comes into effect, keep in mind that these changes may not be in place in the long-term given there is a US presidential election coming up in November.

Remember, the 2021 rule it reverses was implemented right at the end of Trump’s presidency.

While the Biden is anticipated to be the Democratic nominee for this year’s presidential election – Trump is also winning the race for the Republican nomination; will he return the labor regulations back to 2021 standards?

For David Wimmer, labor and employment attorney at Swerdlow Florence Sanchez Swerdlow & Wimmer, the new rule “highlights the political pendulum at play in Washington”.

Not only may a change in president change the employee vs independent contractor balance once again, but, unsurprisingly, legal challenges are expected.

As things stand, ride-hailing and delivery companies like Uber, Lyft and DoorDash, are confident this rule change won’t affect them (and the markets largely agree).

Flex Association, a membership organization for app-based rideshare and delivery companies, shared in an update:

“Independent work has become an indispensable part of the nation’s economy. While we do not anticipate immediate impacts, the Department of Labor’s new guidance could generate significant uncertainty for millions of small business owners and entrepreneurs.

“That’s why we will seek to ensure implementation of this rule does not target workers who overwhelmingly turn to app-based platforms to earn supplemental income on their own terms.”

Wimmer agrees: “The new rule appears to not provide any greater or lesser weight to any of its six factors, meaning companies are left without clear guidance as to what really matter when…determining how to classify their service providers”.

A key factor on future legal challenges to the rule change is how aggressively the Department of Labor will enforce this new rule; as the Washington Post reported, Jessica Looman, administrator of the Department of Labor’s Wage and Hour Division, noted that the government’s priority will be the “most vulnerable, essential workers.”

According to The Economic Policy Institute, among those most at-risk of misclassification as independent contractors are truck drivers, home health aides, janitors, nail salon workers and landscapers.

UNLEASH’s message to HR teams: keep on top of the Department of Labor updates, and stay close to your legal teams (and the regulators) to avoid any non-compliance issue.

Want to dig in more to navigating labor compliance challenges, and specifically figuring out who in your business is a contractor and who is an employee? Well, UNLEASH has got you covered!

Tomorrow, Anita Lettink, plus experts from Atlas, Payroll.org and Payslip, will be sharing their top tips in an exclusive UNLEASH webinar. Register now to join us!