In a pivotal move, the U.S. Department of Labor (DOL) announced a final rule on January 9, 2024, set to take effect on March 11, 2024. This rule fundamentally revises the guidelines for classifying workers as employees or independent contractors under the Fair Labor Standards Act (FLSA).
The Fair Labor Standards Act is a federal law that establishes minimum wage, overtime pay, recordkeeping, and child labor standards for full and part-time employees in both the public and private sectors. One of the challenges of this law is that it does not define an “independent contractor,” thus creating the need for such rules by the Department of Labor.
What is Different?
The new rule, in alignment with longstanding judicial precedent under the FLSA, offers new guidance for determining whether a worker may be classified as an employee or an independent contractor. In doing so, DOL shifts away from the 2021 Independent Contractor Rule which allowed for a much looser analysis. By taking a more complete picture of the employee dynamic, the Department of Labor hopes to mitigate the risks associated with misclassifying employees as independent contractors. Such risks can include jeopardizing workers’ rights to minimum wage and overtime pay, wage theft, and more.
Key Aspects of the Rule:
Multifactor Economic Reality Test.
The DOL determined that a worker cannot be considered an independent contractor “if they are, as matter of economic reality, economically dependent on an employer for work.” That dependence will now be determined by six factors including:
- the opportunity for profit or loss,
- investments by the worker and potential employer,
- permanence of the work relationship,
- degree of control,
- the extent to which the work is integral to the business,
- and the worker’s skill and initiative.
Determining A Worker’s Status
This multi-pronged approach to analyzing the worker’s relationship means that there is no single factor that determines a worker’s status as an employee. Instead, the relationship needs to be examined in its totality so that the overall economic reality can be considered. This also means that a worker does not need to satisfy all the considerations to be considered an employee. Critically, because this new rule is based on understanding the economic reality of the worker, it also means that a worker cannot waive their status as an employee. Though it is not uncommon for employers to utilize “independent contractor agreements” wherein their workers are asked to acknowledge their independent contractor status, these agreements will be of little to no effect under the DOL rule.
Impact on Businesses
While the changes may seem small, they succeed in providing a more robust framework for worker classification and are more congruent with previous interpretations of the FLSA. This change also does not impact the interpretation of any federal, state, or local laws other than the FLSA. As an example, the IRS has different statutory language about how it classifies independent contractors that will not be affected by this rule new DOL rule.
If a business fails to classify a worker accurately, there could be costly legal consequences such as reimbursing any unpaid wages, liquidated damages in an amount equal to back wages, civil monetary penalties, and even attorneys’ fees associated with litigation.
It’s crucial for businesses to re-evaluate their worker classifications and ensure compliance. The Lynch Law Group is dedicated to helping clients navigate these complex changes. We’re here to provide expert legal advice and support to ensure your business practices align with the new regulations. If you have any questions, please contact James McGraw, Partner at The Lynch Law Group at jmcgraw@lynchlaw-group.com.
