In January, the U.S. Department of Labor (DOL) published a final rule regarding employee or independent contractor classification. The rule revised the DOL’s guidance on how to analyze who is an employee or an independent contractor under the Fair Labor Standards Act (FLSA) and becomes effective March 11, 2024. This final rule rescinds and replaces the Independent Contractor Status Under the FLSA Rule that was published in 2021.
The final rule provides detailed guidance on employee or independent contractor status that is not only consistent with the FLSA and the decades of case law interpreting it, but more robust than the Department’s earlier subregulatory guidance on the topic. The final rule will rely on the long-standing multifactor “economic reality” test, that relies on the totality of circumstances, to determine whether a worker is an employee or an independent contractor.
The final rule affirms that a worker is not an independent contractor if they are, as matter of economic reality, economically dependent on an employer for work, using the following six factors:
- opportunity for profit or loss depending on managerial skill;
- investments by the worker and the potential employer;
- degree of permanence of the work relationship;
- nature and degree of control;
- extent to which the work performed is an integral part of the potential employer’s
business; and
- skill and initiative.
The DOL has advised that no factor has a predetermined weight and additional factors may be relevant if such factors in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work (i.e., an employee under the FLSA).
If employees are misclassified as independent contractors, the employer may be liable for back payment of minimum wage and overtime pay, unless an exemption applies. Additionally, employers may have to pay liquidated damages, civil penalties, and attorney fees associated with litigation.
TAKE ACTION:
Review all independent contractors utilized in your business, considering the six factors related to economic dependence to assess whether they continue to meet guidance for classification as an independent contractor.
Consult with your employment law attorney or HR consultant for additional assistance. For additional information, including FAQs and examples provided by the DOL: https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking