Understanding the Proposed 2023 FLSA Changes to Independent Contractor Classification

Recently, the U.S. Department of Labor (DOL) announced a proposal that would change the worker classification rules under the Fair Labor and Standards Act (FLSA) and make it more difficult for businesses to engage workers as independent contractors. But while much of the press coverage has focused on the proposal’s impact on gig platforms (like Uber), the implications are much more far-reaching. The proposed changes to independent contractor classification will have ramifications likely to be felt across a wide range of businesses.

McKinsey has estimated there are 58 million independent workers in the U.S. serving businesses and consumers, while DOL settles on 22 million (which it concedes is a conservative estimate). In any case, the numbers are very large, and a growing number of these workers fall into “professional staffing categories” such as IT, healthcare, engineering and finance.

The relationships with the vast majority of these mission-critical workers – who are not employees of the business, a staffing supplier or a professional services firm – will be subject to new worker classification standards, standards which present added risks and administrative burdens.   

The proposal could be finalized as early as January 2023. It is therefore important for businesses to become acquainted with the updated rules, the standards and tests for distinguishing independent contractors and employees, and the related business implications. Understanding the proposal and taking related strategic measures will be critical to organizations’ ability to continue leveraging these critical knowledge workers while minimizing risk. 

Comments on the Proposed Rule in a Nutshell

According to JD Supra, “the proposed rule, the latest in a tumultuous line of regulations on the independent contractor topic, would establish a framework for applying a redrawn ‘economic reality’ test to worker classification” to help combat misclassification of independent contractors.

Per the National Law Review, “the proposed rule, which would rescind and replace a prior rule published in January 2021, would shift the analysis of whether a worker is an employee of a business for purposes of the [Fair Labor Standards Act (FLSA)] from a more streamlined ‘economic reality’ test to a more complex (six-factor) ‘totality-of-the-circumstances' standard.”
Further, the new proposed rule would do away with prioritizing only some factors and return to a focus on a “multifactor economic reality” in which no one factor or set of factors is presumed to carry more weight.

The new rule, therefore, will not only change the standards by which the DOL determines whether a worker is an employee of a business for purposes of the FLSA, but could also increase uncertainty and the risk of worker misclassification, despite the additional guidance provided by the DOL within the proposal. 

Preparing for the New Rules

Given the proposed rule, business leaders who want to proactively stay in front of potential legislation should:

• Think about how they will mitigate the misclassification and co-employment risks
• Consider potential operational delays (e.g., in sourcing and onboarding workers) and increased compliance overheads
• Think about how they can plan, manage and optimize their entire – employee and contingent – workforce more holistically while remaining compliant  

To help with the above, consider enlisting an Integrated Workforce Management (IWM) provider. A top-tier IWM provider can support organizations in their current challenge of determining worker classification, thus reducing risks, overhead costs, and the time required of HR and other managers. It can also guide organizations toward alternative work arrangements that can eliminate potential liabilities associated with the engagement of independent contractors.

For example, in addition to turning to staffing agencies and professional services firms, businesses can engage individual independent workers – efficiently and with minimal risk – through an Employer-of-Record (EOR)/Payroller. In this model, independent workers become statutory employees of the third-party EOR over the course of their engagement, thus significantly reducing misclassification and co-employment risk.

Ultimately, an IWM can do much more than ease the immediate burdens of managing independent contractor misclassification risks. It can also support the development and realization of alternative workforce models that minimize compliance risks, reduce costs, improve access to talent, and increase the organizational and business agility needed today.

If you’re interested in learning more about how Magnit is helping organizations implement winning contingent workforce programs globally, please contact a Magnit representative at info@magnitglobal.com.

Disclaimer: The content in this blog post is for informational purposes only and cannot be construed as specific legal advice or as a substitute for legal advice. The blog post reflects the opinion of Magnit and is not to be construed as legal solutions and positions. Contact an attorney for specific advice and guidance for specific issues or questions.