The U.S. Department of Labor (DOL) has announced a final rule regarding the classification of workers as employees versus independent contractors under the Fair Labor Standards Act (FLSA).
The final rule, which is effective March 11, 2024, mirrors the proposed rule the DOL released on October 11, 2022. It is significantly different from the Trump Administration’s “core factors” test, which instructed courts to focus on two factors – (1) the nature and degree of the worker’s control over the work, and (2) the worker’s opportunity for profit or loss.
The final rule marks a return to the totality-of-the-circumstances economic reality test that courts previously applied. It will require courts to consider the six economic reality factors with equal weight when deciding whether a worker is an employee or an independent contractor. Those factors include: (1) the worker’s opportunity for profit or loss; (2) investments by the worker and the potential employer; (3) how permanent the work relationship is; (4) nature and degree of control; (5) whether the work is an integral part of the potential employer’s business; and (6) skill and initiative. It is likely that the new rule will be subject to challenges in court.
This final rule seems to resemble the “ABC test” that many state courts apply, including California, New Jersey, and Massachusetts. The ABC test presumes that workers are employees unless the employer can establish otherwise, meaning courts are more likely to classify workers as employees than independent contractors. However, the DOL has explicitly stated that the final rule does not adopt an “ABC test” because there are certain differences in how the ABC test is applied.
The DOL’s restoration of the multi-factor analysis seeks to combat the potential misclassification of workers, as the new rule is more protective of workers’ rights than the rule used during the Trump Administration. As a general rule, employees have more rights than independent contractors because the FLSA’s minimum wage and overtime pay protections do not apply to independent contractors. As such, employers that misclassify workers as independent contractors improperly deny them federal labor protections.
Under the Trump-era rule, courts and employers could classify workers as independent contractors based upon just two factors – even if the broader economic-reality test indicated otherwise. But starting March 11, 2024, employers will need to be more stringent about how they categorize their workers. They will no longer be able to classify their workers as independent contractors without looking at the totality of the circumstances.
A finding of misclassification can result in expensive penalties, such as unpaid overtime and minimum wage, liquidated damages and attorneys’ fees. The IRS can levy additional penalties for misclassification – including criminal charges – if the IRS suspects an employer intentionally misclassified its employees. Employers should take precautions, such as consulting a checklist or structured guidelines each time they hire a new worker. Implementing a standardized system will help to clarify the status of all new hires. Employers should also conduct routine checks to ensure that workers who they hired as independent contractors have not become employees over time due to a shift in the nature of their work. Employers should also recognize that it is not a defense to a misclassification claim that a worker requested to be treated as an independent contractor.
Proper classification of workers can be confusing. Employers should seek legal assistance to confirm they are complying with all federal and state rules.
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