Mar 26, 2024

Final Rule on Independent Contractor Classification

By: Marissa Cerkoney

On January 10, 2024, the Department of Labor published a final rule on how to determine whether a worker is an employee or an independent contractor under the federal Fair Labor Standards Act (FLSA). Under the FLSA, employees are entitled to minimum wage, overtime pay, and other benefits that independent contractors are not entitled to. The misclassification of employees as independent contractors may deny workers of the benefits and protections they are entitled to under the FLSA and such misclassification could lead to serious ramifications for employers.

The Department of Labor’s new rule is effective March 11, 2024, and is bringing back the “totality of the circumstances” approach that is consistent with the one federal courts have utilized. The new implements a six-factor test that considers the following for determining employee or independent contractor status:

1) The worker’s opportunity for profit or loss depending on managerial skill;

2) The investments by the worker and the potential employer;

3) The degree of permanence of the work relationship;

4) The nature and degree of control over the work;

5) The extent to which the work performed is an integral part of the potential employer’s business; and,

6) The amount of skill and initiative required for the work.

As mentioned above, the analysis under the new rule utilizes a totality of the circumstances approach and the factors do not have a predetermined weight; no one factor is dispositive in determining whether a worker is an employee or an independent contractor. Additional factors may be relevant if they bear on whether the worker is economically dependent on the potential employer for work and, considering the factors as a whole, the worker is not likely to be an independent contractor if the worker is economically dependent on an employer for work.

The new rule is significantly more “employee friendly” than the previous rule, which only had a five-factor test and put more weight on the nature and degree of control over the work and the worker’s opportunity for profit or loss. Despite the Department of Labor’s belief that the new rule will provide clarity and consistency in classifying workers, it could potentially do the opposite and making classification more difficult due to there being more factors to consider and none of them being more determinative than others of a worker’s status. Businesses, specifically those that rely on the use of independent contractors, carry the risk of increased misclassification under the new rule.

The Takeaway:

The Department of Labor’s new rule in determining employee or independent contractor status carries the risk of increased misclassification. Businesses should evaluate their current independent contractors, as well as future independent contractors, to ensure that they are properly classified under the factors of the new rule. The misclassification of employees as independent contractors may deny workers of the benefits and protections they are entitled to under the FLSA and such misclassification could lead to serious ramifications for businesses, such as potential litigation to have independent contractors reclassified as employees and for the award of damages for pay that a worker would have received had they been properly classified as employees. To ensure that workers are being properly classified, employers are well-advised to seek the help of legal counsel.

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(Otherwise known as “the fine print”)

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Reprinted with permission from an article submitted for publication in the March, 2024 Southwest Area Human Resource Association newsletter.