Periodic reviews of staff classifications will help avoid conflict with a recent federal labor rule change
How Does the New Labor Rule Affect My Business?
As an education entrepreneur, you’re not just creating a business, you are impacting the lives of children and families in a very personal and profound way. Navigating a complex regulatory landscape is just one aspect of this journey and involves understanding how the Fair Labor Standards Act (FLSA) applies to how you classify people helping either as employees or independent contractors.
The FLSA is a foundation for employment law in the United States, establishing standards for wages, overtime, and other employment rights. Recognizing how this law applies to your team is important to your operation’s success and integrity. The FLSA establishes, among other things, that employees (distinct from independent contractors) have a legal entitlement to a minimum wage and overtime pay. As owner of a business, you bear the responsibility to accurately classify workers as either employees or independent contractors. Incorrectly classifying staff can lead to significant legal and financial repercussions which can seriously impede your educational venture.
In January, the US Department of Labor published a final rule establishing a framework to determine whether a worker is an employee or independent contractor. The new rule, effective March 11, reaffirms that the determination of a worker as an independent contractor or employee hinges on economic dependence, and establishes six factors to be considered. The rule adopts a totality-of-the-circumstances approach in the economic reality test, meaning that instead of assigning a fixed weight to any specific factor or group of factors, the rule encourages a more holistic view of each case.
Many businesses may use independent contractors because they often involve fewer administrative burdens and costs. But under the new rule this may become more difficult to justify. Employers handle payroll taxes, including withholding income taxes and contributing to Social Security, Medicare, and unemployment insurance for their employees. This contrasts with independent contractors, who manage their own tax obligations. Employers may be required to provide certain benefits like health insurance, retirement plans, and workers’ compensation insurance, which can represent a substantial cost and administrative burden. Compliance with minimum wage and overtime pay standards under the FLSA is also mandatory for employees, necessitating tracking of work hours by the employer.
This article is not legal advice but rather a guide to help you understand the new rule in plain English so that your educational venture can focus on the core mission of educating children.
Six Factors to Consider
Classifying a worker as an employee implies a deeper level of investment and involvement from the employer, both financially and in terms of workforce management, reflecting the more integral and dependent nature of the employee-employer relationship. The rule lays out six factors to consider in determining if a worker is an independent contractor or an employee.
Opportunity for Profit or Loss: To what extent can the worker influence their own financial success or failure? This assesses how much control a worker has over the potential to earn profits or incur losses beyond fixed hourly or salary compensation. This includes the worker’s autonomy in making decisions that affect costs, pricing, and investment in equipment or materials. A worker who can negotiate rates, choose clients, and manage a budget independently typically demonstrates characteristics of an independent contractor.
Investments by Worker and Employer: What is the nature of investments made by both the worker and the employer? For a worker, investments might include purchasing tools, equipment, or technology essential for their work. For the employer, it could be the investment in the overall infrastructure supporting the worker’s role. The key is to distinguish between investments that support an ongoing business operation (indicative of an independent contractor) and those that are typically borne by an employer for its employees.
Permanence of Work Relationship: How long and how exclusive is the working relationship? A long-term, exclusive relationship suggests a traditional employer-employee dynamic. In contrast, if a worker engages in short-term, project-based, or non-exclusive work, it could indicate an independent contractor status. This factor considers the intention of both parties regarding the longevity and exclusivity of the relationship.
Degree of Employer Control: How much control does the employer has over the worker’s activities, schedule, and work conditions? High levels of control over when, where, and how a worker completes their tasks tend to suggest an employee relationship. In contrast, if a worker has significant autonomy in setting their schedule, choosing methods of work, and deciding on the work environment, this points more towards independent contractor status.
Centrality of Work to Business: How integral is the worker’s role to core business operations? If the work performed by the worker is at the heart of what the business offers, this suggests an employee relationship. Conversely, if the work is more peripheral or supplementary to the main business activities, it may indicate that the worker is an independent contractor.
Skill and Initiative of the Worker: Does the worker use specialized skills and demonstrate business-like initiative? This includes considering if the worker is actively marketing their services, seeking new clients, and making decisions that affect their business’s growth and direction. It distinguishes between workers who are dependent on a particular employer for ongoing work and those who take initiative to operate their own business.
Each of these factors must be considered in the context of the total relationship between worker and employer. No single factor is determinative on its own; together they paint a picture of the working relationship that guides the classification decision. Understanding and correctly applying these factors ensures that workers are classified appropriately, safeguarding their rights, and maintaining employer compliance with the FLSA.
Some Steps You Can Take
Be proactive in evaluating how you are classifying staff. Seek expertise. Educate and inform your team. You can submit a request for assistance to the Yes Foundation Edupreneur Support Program and talk with a Yes Foundation attorney about your situation. Although our attorneys will not provide legal advice, they will help you understand the rules.
Ongoing Role Evaluation
Regularly reassessing the roles within your organization is crucial to maintaining alignment with FLSA guidelines. This process involves a thorough review of each position to ensure that duties, responsibilities, and actual day-to-day activities reflect the correct classification. It’s important to remember that job titles alone do not determine a worker’s status; rather, it’s the nature of the work performed and the way it is performed that are key.
This ongoing evaluation should be dynamic, adapting to any changes in work patterns, responsibilities, or business models. For example, if a role evolves to include more decision-making autonomy or if the business starts providing more tools and equipment necessary for the job, these changes could affect the worker’s classification. Periodic reviews, ideally annually or when significant changes in job roles occur, will help ensure that classifications remain accurate and compliant with current regulations.
Seek Help
Navigating the complexities of FLSA regulations often requires specialized knowledge. Utilizing legal and human resources (HR) professionals is a wise strategy to effectively manage these challenges. HR professionals play a crucial role in implementing compliant practices within your organization. They can assist in developing job descriptions that accurately reflect the nature of the work, advise on best practices for documenting work patterns and control measures, and help establish policies that align with FLSA requirements.
Legal experts, particularly those specializing in labor law, can provide invaluable guidance on the nuances of FLSA compliance and help interpret how the regulations apply to your specific organizational context. Involving these professionals in your regular role evaluations and decision-making processes ensures that you have access to current and comprehensive expertise, minimizing the risk of non-compliance.
Educate and Work Collaboratively With Your Team
Be open with your team about the applicability of the FSLA and its impact on them. It’s beneficial to foster an open environment where team members can ask questions and express concerns about classification and compliance. This not only helps in clarifying doubts but also promotes a culture of transparency and compliance within the organization.
Don’t Give Up!
As you forge ahead in creating dynamic and transformative learning spaces, understanding, and adhering to the FLSA’s worker classification rules – particularly in light of the 2024 rule change – will help you maintain compliance and operate a business that is less exposed to regulatory risk.
To speak with one of our Edupreneur Support Program attorneys who may be able to help you better understand what these rules mean to you, submit a request at www.yeslegal.org.
