On January 9, 2024, the U.S. Department of Labor (DOL) announced the Final Rule with respect to classifying workers as employees or independent contractors under the Fair Labor Standards Act (FLSA). The DOL also provides FAQs to aid interpretation of the Final Rule. The independent contractor Final Rule takes effect on March 11, 2024.
The Final Rule provides employers with comprehensive guidance on how to properly classify workers and avoid misclassification issues that may arise with respect to minimum wage, overtime, and other wage issues. The Final Rule will reduce the risk that employees are misclassified as independent contractors, while at the same time providing greater consistency for businesses engaging with self-employed individuals.
The Final Rule returns to the multifactor totality-of-the-circumstances test to ensure that all relevant factors are analyzed to determine whether a worker is an independent contractor or an employee. The Final Rule identifies six factors to guide this analysis of the worker’s relationship with the employer, including:
- 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 provides detailed guidance on applying each of these six factors. As per the Final Rule, the factors do not have a predetermined weight and are considered in light of the economic reality of the whole activity. The DOL advises that the above-referenced six factors are not exhaustive, and no single factor is dispositive. Additional factors may be considered if they are relevant to the overall question of economic dependence.
Separately, the DOL rescinded the prior July 7, 2021, independent contractor rule as being inconsistent with the law and defying long-standing judicial precedent. The DOL replaces it with guidance on how to analyze employee or independent contractor classification that is more consistent with the FLSA as interpreted by longstanding judicial precedent.
The Final Rule only revises the DOL’s interpretation under the FLSA and has no effect on other laws—federal, state, or local—that use different standards for employee classification such as the Internal Revenue Code (IRS) and the National Labor Relations Act (NLRA).
In fact, just recently, in Atlanta Opera, 372 NLRB No. 95 (2023), the National Labor Relations Board (NLRB) modified the test to apply when determining whether a worker could be classified as an independent contractor as opposed to an employee, essentially making it more difficult for employers to misclassify workers in order to evade employment obligations. The NLRB returned to a standard providing that independent contractor status should be evaluated “in light of the pertinent common-law agency principles” and “all of the incidents of the relationship must be assessed and weighed with no one factor being decisive.” The NLRB directed that the inquiry should be guided by the nonexhaustive common law factors enumerated in the Restatement (Second) of Agency, Section 220(2) including:
- The extent of control which, by the agreement, the master may exercise over the details of the work;
- Whether or not the one employed is engaged in a distinct occupation or business;
- The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;
- The skill required in the particular occupation;
- Whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;
- The length of time for which the person is employed;
- The method of payment, whether by the time or by the job;
- Whether or not the work is part of the regular business of the employer;
- Whether or not the parties believe they are creating the relation of master and servant; and
- Whether the principal is or is not in business.
Further, the DOL stated that the Final Rule has no effect on state wage-and-hour laws such as those in California and New Jersey which use an “ABC” test. For example, The DOL reiterated that the FLSA does not preempt any other laws that protect workers, so businesses must comply with all federal, state, and local laws that apply, and ensure that they are meeting whichever standard provides workers with the greatest protection. (29 U.S.C. 218).
For example, in Hargrove v. Sleepy’s, 220 N.J. 289 (2015), the New Jersey Supreme Court stated that in evaluating whether an individual is properly classified as an employee or independent contractor under wage and hour laws, New Jersey courts should apply the “ABC Test.” Under the “ABC Test,” an individual is presumed an employee unless an employer can prove that: (1) the employer neither exercised control over the worker, nor had the ability to exercise control in terms of completion of the work; (2) the services provided were either outside the usual course of business or performed outside of all the places of business of the enterprise; and (3) the individual has a profession that will plainly persist despite termination of the challenged relationship. An employer’s failure to meet any one of these criteria will result in the worker being classified as an employee.
Takeaways:
In light of the Final Rule, employers should:
- Understand which tests apply and consider the relevant factors to determine whether a worker is truly an independent contractor.
- Audit and evaluate the current relationships they have with workers and ensure proper classifications to avoid liability.
- Take corrective action if the employer believes workers are misclassified.
- Understand the consequences for misclassification which may include liability for unpaid wages, overtime, benefits, and taxes, as well as additional legal fines, civil or criminal penalties, liquidated damage, attorneys’ fees, and potential injunctive relief.
- Review and revise policies and procedures with respect to workforce planning as well as procedures for engaging with independent contractors.
- Train managers and supervisors on navigating independent contractor relationships.
This summary is for informational purposes only and is not intended to constitute legal advice. This information should not be reused without permission
