Earlier this month, the U.S. Department of Labor (“DOL”) released its Final Rule on employee or independent contractor status under the Fair Labor Standards Act (“FLSA”). The rule goes into effect on March 11, 2024. The Final Rule marks a significant change from the current rule (which only became effective in January 2021). Between now and the March 11, employers should review the way they have classified their workers to ensure compliance with the more stringent new Final Rule.
The DOL’s Final Rule will become the test that the agency (and, generally, the courts) will apply when analyzing whether a worker should be classified as an employee instead of an independent contractor under the FLSA. If a worker is properly classified as an independent contractor, businesses do not need to worry about minimum wage, overtime pay, and other protections afforded to employees under the FLSA. It is no surprise, then, that the DOL has an interest in ensuring that workers classified as independent contractors are not just misclassified employees being deprived of their FLSA rights.
According to the DOL, the Final Rule establishes a six-factor test that is “based on the economic reality of the worker and potential employer relationship and may have a substantial impact on a number of industries.” It represents a return to a totality-of-the-circumstances analysis. The six factors include the following:
- 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.
None of these six factors is dispositive. In other words, all of the facts and circumstances of each worker’s situation matter and no one factor dictates the contractor-or-employee outcome.
It comes as no surprise that a lawsuit challenging the rule has already been filed. About a week after the DOL announced the Final Rule, a group of freelance writers and editors, who enjoy their independent status and do not wish to become employees under the Final Rule, sued the DOL in a court in Georgia. They are seeking an injunction to prevent the rule from going into effect in March, and also asking the court to strike the Final Rule down because it is unlawful. We will have to wait and see what happens with that lawsuit, and with the other lawsuits that may very well come in the next few weeks or months.
Employers must not forget that many states have their own independent contractor tests which must be followed. For example, Massachusetts has one of the most restrictive tests in the country, which results in most Massachusetts workers being employees, not contractors. To avoid liability for misclassifying workers, employers should ensure they are in compliance with applicable state laws and regulations and this new Final Rule starting on March 11, 2024 (absent any court intervention, anyway).
We will be discussing the DOL’s new Final Rule, and much more, at our upcoming Wage and Hour Update Breakfast Briefing on February 15, 2024. Click here for more information or to register for our Wage and Hour Update Breakfast Briefing.