Direct Sales and MLM

Thoughts A Brewin' Newsletter 8:The Impending Threat of Employee Classification

By
Clay Brewer

The ongoing debate distinguishing employees from independent contractors takes another turn on March 11, 2024, when the Department of Labor’s (DOL) revised rule under the Fair Labor Standards Act (FLSA) goes into effect.

The DOL’s executive summary of the rule states that “the term “independent contractor” refers to workers who, as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves.”  Under this definition, companies need to loosen the control they have over individuals or face federal consequences as well as the numerous state consequences that may arise. As an example, I wrote previously about California’s Private Attorney’s General Act (PAGA).

There are six factors that assist in determining whether an individual is an employee under the new rule:

(1) the nature and degree of control over the work;

(2) the worker's opportunity for profit or loss;

(3) the amount of skill required for the work;

(4) the degree of permanence of the working relationship;

(5) whether the work is part of an integrated unit of production; and

(6) the extent of the relative investments of the worker and the potential employer.

The previous rule placed emphasis on the first two, designating them “core factors.” The new rule claims to “return[ ] to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.”

While six factors are listed, the test is not necessarily limited to these six factors alone, resulting in further factor-specific inquiry on each case.

The subjectivity of the new rule permits flexibility and an analysis requirement for each instance, but companies who utilize independent contractors should be put on notice because subjectivity makes for easy arguments.  

This new rule, along with employee-friendly laws and regulations such as PAGA, should incentivize companies to becoming more proactive, especially those operating within the direct selling space. As the digital age continues to take shape and individuals are permitted to market and sell their brands and their products across a variety of platforms, companies need to be aware of the restrictions they place upon their salesforce and the implications of those restrictions.

Direct selling companies, in particular, should take the wise counsel of 38 Special in their song “Hold On Loosely” before it’s too late: “Just hold on Loosely. But don’t let go. If you cling too tightly. You’re gonna lose control.”

In the hopes of maintaining their salesforce and placing more and more restrictions upon their distributors, companies are losing control. I anticipate, not simply because of this rule revision, that the arguments for distributors being employees will return to the forefront in the coming months and years.

Clay Brewer
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