SCMP Breaking News - Labor & Employment
Year 9, Vol. 1 - January 25, 2024
On January 9, 2024, the U.S. Department of Labor (DOL) issued a Final Rule (“Final Rule”) defining the term independent contractor under the Fair Labor Standards Act (“FLSA”). According to the DOL, the 2024 rule is intended to “reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.” The Final Rule repeals the “core factors” test established under the DOL’s prior rule from 2021 and reinstates the “totality of circumstances” analysis.
What is the test under the New Rule?
Under the Final Rule, which will become effective on March 11th, 2024, six (6) general factors are to be considered equally, with no factor to be given predetermined weight over other factors to determine. These are: (i) opportunity for profit or loss; (ii) investment; (iii)permanency;(iv) control;(v) whether the work is an integral part of the employer’s business; and (vi) skill and initiative.
Under the prior rule from January 7, 2021, the DOL had analyzed independent contractor status based on a “core factors” test, which considered the comparative value of two “core” factors: “the nature and degree of the individual’s control over the work” and “the individual’s opportunity for profit or loss.”
The Analysis under PR Law is Different
The “economic reality” test established by the DOL’s new rule provides a different analysis for determining independent contractor status than that provided for under Puerto Rico local law.
Under Law No. 4-2017, there is an incontrovertible presumption that a person is an independent contractor if he/she meets the following specific criteria: possession or request of an employer identification number or employer social security number; filing of income tax returns claiming sole proprietorship; and the existence of a written professional services agreement. Moreover, to be classified as an independent contractor under Act No. 4-2017, the person must also meet at least three (3) of the following criteria: (1) control and discretion as to how the work shall be performed; (2) control and discretion over the moment in which the work shall be performed; (3) the person is not required to work exclusively for the principal; (4) the person is free to hire employees; and (5) the person has made an investment in his or her business to render the contracted work.
Because individuals may meet the criteria for independent contractor under Act No. 4-2017, but not under the New Rule, employers must analyze employees under both Act No. 4-2017 and the Final Rule to make sure they meet the factors of an independent contractor under both analyses in order to avoid misclassifying workers.
What should employers do?
To reduce the risk of misclassification and avoid potential penalties, employers must analyze employees under the criteria for “independent contractors” outlined in both Act. No. 4-2017 and the New Rule to ensure that the employee in question meets the factors under both tests.
Employers should routinely review and analyze the status of workers who were originally hired as independent contractors to ensure that have not become employees at any given time.
SCMP will keep you updated as to any developments regarding this very important and crucial matter for employers in Puerto Rico.
Should you require further advice or assistance in relation to this matter, please contact us at (787) 945-0380.
Because of the general nature of this newsletter, nothing herein should be construed as legal advice or a legal opinion. SCMP Breaking News and all its content is property of Silva-Cofresí, Manzano & Padró, LLC
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