Worker classifications reclassified

In January, the Department of Labor published a final rule, the Employee or Independent Contractor Classification Under the Fair Labor Standards Act. The rule, originally proposed in October 2022, modifies the rules governing the determination of independent contractor status under federal law.

Independent contractors

The independent contractor or subcontractor model of employment has been widely used within the roofing industry for decades. Independent contractors serve a vital function in roofing and other segments of the construction industry by providing specialized skills in a flexible manner. Employers use this option to provide high-quality products and services to consumers at the lowest possible price. This enables companies to efficiently meet short-term needs and adjust to fluctuating changes in the marketplace. In addition, the independent contractor model provides advantages to entrepreneurial workers such as increased flexibility, autonomy and opportunity to maximize earnings for their work.

Under the Fair Labor Standards Act, which was enacted by Congress more than 80 years ago, employers are required to provide certain benefits such as wages and overtime compensation to employees but are not required to do so for individuals who serve as independent contractors. To determine whether an individual is an employee or independent contractor, an employer must analyze the relationship with the individual based on regulations issued by the department in accordance with the underlying statute, as well as state laws. The federal rules have changed several times in recent years.

Final rule

DOL’s new final rule substantially modifies the rules governing the determination of independent contractor status. This rule rescinds the standard issued in January 2021, which focused on five factors (occasionally termed the “economic realities test”) for determining the designation of an independent contractor.

The 2021 regulation placed the greatest emphasis on two primary factors: employers’ level of control of the work being performed and the opportunity for independent contractors’ profit or loss in the arrangement.

Additionally, the 2021 regulation allowed for three secondary factors to be considered: the amount of specialized skill required to complete the work, the degree of permanence in the relationship between the employer and worker, and whether the work being performed involves an integrated unit of production.

The final 2024 rule implements a broader “totality of circumstances” analysis that contains the following six equally weighted factors to determine independent contractor status:

• The opportunity for profit or loss depending on managerial skill
• Investments by the worker and the employer
• The degree of permanence of the work relationship
• The nature and degree of employer control
• The extent to which the work performed is an integral part of the employer’s business
• The worker’s use of skill and initiative

Also, the rule provides that “other factors” unique to a given situation could be relevant to the final determination of independent contractor status on a case-by-case basis. The final rule is similar to the federal rules in place from 2015 to January 2021 before adoption of the 2021 rule.

DOL indicates this new standard is “more consistent with the FLSA as interpreted by the courts” and it “will reduce the risk that employees are misclassified as independent contractors.” Department officials indicate this new definition is designed to combat the deliberate misclassification of employees as independent contractors by employers, and it will not result in widespread reclassification of workers who are properly classified as independent contractors.

NRCA’s standpoint

NRCA submitted comments about the original proposed rule released in October 2022 and noted maintaining the independent contractor option is important because it enables employers to have flexibility to meet market conditions. Additionally, NRCA recognizes the need to guard against deliberate misclassification of workers to protect employers and employees who are properly following the law.

Roofing contractors who use independent contractors or may be considering using the option in the future are urged to carefully review the final rule.

Given the complex analysis of factors that determine independent contractor status, companies should consider consulting legal counsel to ensure all operations comply with the new standard before it takes effect. Employers should expect significant enforcement efforts by DOL once the new rules are in place. In addition, some states have additional rules that may apply with respect to state laws governing different types of employment arrangements.

More information about the final rule, including frequently asked questions and a Small Entity Compliance Guide, is available at dol.gov.

NRCA will continue working in support of fair, consistent independent contractor rules as the new standard is implemented.

DUANE L. MUSSER is NRCA’s vice president of government relations in Washington, D.C.