by This week, the U.S. Department of Labor (DOL) issued its Final Rule on analyzing whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The rule is effective March 11, 2024.
The new rule rescinds a 2021 rule adopted in the final weeks of the previous administration. It restores the multifactor, totality-of-the-circumstances analysis to assess whether a worker is an employee or an independent contractor under the FLSA. A critical difference between the rescinded rule and the new rule is using economic reality factors in determining the appropriate classification without assigning a predetermined weight to a particular factor or set of factors. The economic reality factors listed in the rule include:
- The opportunity for profit or loss based on the worker’s managerial skill;
- Investments by the worker and by the potential employer:
- The degree of permanence of the work relationship;
- The nature and degree of control by the potential employer over the details of work ;
- The extent to which the work performed is an integral part of the potential employer’s business; and
- The worker’s skill and initiative.
The DOL considers misclassification to be a serious issue that denies employees’ rights and protections under federal labor laws. Under the practices outlined in the DOL Field Operations Handbook, the investigation of any FLSA claim may be expanded to include a review of possible misclassification. The Field Operations Handbook (FOH) is an operations manual that provides Wage and Hour Division (WHD) investigators and staff with interpretations of statutory provisions, investigation procedures, and general administrative guidance.
Misclassifying employees as independent contractors is one of the issues highlighted in recent data and investigation-sharing agreements between the DOL and other federal agencies. The DOL may share misclassification claims and investigations with other federal agencies concerned about the issue, including the IRS, the National Labor Relations Board, and the Equal Employment Opportunity Commission. Classification determinations require a close examination of the facts of the situation. Other agencies may use tests other than the DOL’s multifactor test in evaluating whether the information shared by the DOL supports a misclassification finding under the laws they enforce.
The new rule does not replace the various tests states may use to review misclassification claims. Compliance with unemployment compensation and workers’ compensation law are among the reasons states may review classifications.
Given the many parties interested in whether a company has appropriately classified workers, an employer may face a variety of consequences if it is determined that it has treated a worker as an independent contractor instead of an employee, such as:
- Fines and other penalties under the law or regulation being enforced.
- Liability for minimum wage and overtime pay.
- Liability for failure to provide or to have interfered with the legal right to family and medical leave or other federally or state-protected leaves or job accommodations.
- Liability for discrimination or retaliation as protected by the various state and federal employee nondiscrimination laws.
- Liability for failure to provide contributions that may be required of employers under state unemployment insurance and workers’ compensation laws.
- Liability for failure to properly withhold income taxes and to make employer contributions for Social Security and Medicare taxes.
For more information on the new DOL rule, see the agency fact page at https://www.dol.gov/agencies/whd/flsa/misclassification.
