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However, compliance can be difficult as federal and state agencies with an interest in ensuring appropriate classification have different tests for making this determination. Further complicating things, some tests have flip flopped from administration to administration.
One recent example involves the U.S. Department of Labor (“US DOL”). The US DOL enforces the federal Fair Labor Standards Act (“FLSA”), which provides minimum wage and overtime protections for non-exempt employees.
On January 10, 2024, the US DOL issued a new rule for determining employment status under the FLSA. The prior rule – issued at the end of the Trump Administration – emphasized five “economic reality factors” relevant to the analysis, with more weight given to two factors: (1) the worker’s opportunity for profit or loss, and (2) the nature and degree of control exercised by the putative employer over the worker.
The new rule has six factors and emphasizes the “totality-of-the-circumstances,” meaning that none of the factors take precedence, and should all be considered in determining the appropriate classification. The six-factors include:
1. A worker’s opportunity for profit or loss depending on managerial skill;
2. The financial stake/investments by the worker;
3. The degree of permanence of the work relationship;
4. The nature and degree of control a potential employer has over the work;
5. The extent to which the work performed is an integral part of the potential employer’s business; and
6. The worker’s skill and whether those skills contribute to business-like initiative.
The DOL has indicated that the purpose of the rule is to “reduce the risk that employees are misclassified as independent contractors.” It is anticipated that the new rule will require millions of current independent contractors to be reclassified as employees.
The new rule will be effective March 11, 2024. In the meantime, employers should review their workers’ classifications. When reviewing classifications, employers should consider the tests under other applicable statutes, including, e.g., the Internal Revenue Code, the National Labor Relations Act, Title VII, and state laws.
Issuance of the new DOL rule will provide employers with a good opportunity to conduct this review and make any changes necessary to comply with applicable law.
This information is for educational purposes only to provide general information and a general understanding of the law. It does not constitute legal advice and does not establish any attorney-client relationship.
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