The U.S. Department of Labor (DOL) recently released a final rule revising its guidance on analyzing workers’ employee or independent contractor status under the Fair Labor Standards Act (FLSA). Effective March 11, 2024, this final rule rescinds the current independent contractor rule published on Jan. 7, 2021. If this rule becomes effective, it may result in classifying a greater number of workers as employees—not independent contractors. This change would be significant, particularly in the gig economy, as it would afford more individuals rights and protections under the FLSA.
Under the FLSA, employees are entitled to minimum wage, overtime pay and other benefits. Independent contractors are not entitled to these protections and benefits. Misclassifying workers as independent contractors can have serious financial and legal consequences for employers, including costly litigation, penalties and attorney fees. It’s critical that employers understand the new rule and its potential impacts on their businesses, as the final independent contractor rule could significantly affect employers’ operational and compliance costs and increase their litigation risks.
Business Implications of the New Rule
The 2021 Independent Contractor Rule made it easier for employers to classify workers as independent contractors under the FLSA. This rule focused on two core factors: the nature and degree of the worker’s control over the work and the worker’s opportunity for profit and loss based on initiative or investment. These factors carried more weight in determining the status of independent contractors than the three other ERT factors (the amount of skill required for the work, the degree of permanence of the working relationship and whether the work is part of an integrated unit of production). However, the DOL’s new rule will likely make it more difficult for employers to classify workers as independent contractors by reinstating the complex multifactor and totality-of-the-circumstances analysis, which is generally viewed as more employee-friendly. As a result, the new rule will likely lead to more employees being classified as employees.
The DOL’s final rule will likely significantly increase the risk of employee misclassification for employers. Consequently, employers may face increased liability risks, such as class-action lawsuits or administrative actions, for not providing FLSA-required benefits and protections to workers. This will likely impact small businesses more than larger organizations because they generally do not have the resources or necessary staffing to address complex compliance issues, such as employee classification under the FLSA.
The DOL’s New Independent Contractor Rule
The final rule rescinds the 2021 Independent Contractor Rule and returns to the pre-2021 rule precedent. In doing so, the final rule restores the multifactor, totality-of-the-circumstances analysis to assess whether a worker is an employee or an independent contractor under the FLSA.
The final rule ensures that all economic realities test (ERT) factors are analyzed equally without assigning a predetermined weight to a particular factor or set of factors. These six factors include:
1. The opportunity for profit or loss, depending on managerial skill
2. Investments by the worker and the potential employer
3. The degree of permanence of the work relationship
4. The nature and degree of control
5. The extent to which the work performed is an integral part of the potential employer’s business
6. The worker’s skill and initiative it more difficult for employers to classify workers as independent contractors
Preparing for the New Rule
Although the DOL’s final rule does not impose any new requirements on employers until it becomes effective, employers should become familiar with the final rule and evaluate what changes they may need to adopt if it becomes effective. Employers can prepare for the DOL’s new independent contractor rule by ensuring they comply with all employee classification requirements under the FLSA. This is especially important for organizations that rely on independent contractors.
Employers can better ensure compliance with the DOL’s final rule by taking the following actions:
- Audit existing working relationships with gig workers, freelancers, independent contractors and employees.
- Determine whether any workers’ classifications must be changed in light of the final rule.
- Review any agreements with gig workers, freelancers, independent contractors and employees to ensure they comply with the final rule.
- Update employment policies and procedures to align with the DOL’s final rule.
- Train managers on the FLSA’s worker classification requirements.
While the DOL’s final rule only applies to the FLSA, many states have rules for determining worker classification. To avoid potential violations and penalties, employers need to be familiar with all laws that apply to their organizations. Employers are encouraged to seek legal counsel to discuss specific issues and concerns.
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Employer Takeaway
If the DOL’s final rule becomes effective, it will significantly impact most employers. Savvy employers will take the time to revisit their worker classifications and understand the final rule’s potential impact on their organizations. By taking a proactive approach and reassessing worker classifications, employers can help ensure they meet compliance requirements and mitigate potential legal risks.
With Tilson, employers can relax because we’ve got them covered. Our trusted risk management professionals stay up-to-date on the never-ending employment regulations and reporting practices, to help you navigate, comply and protect your business. Contact us today to learn more!
