On January 10, the U.S. Department of Labor (DOL) published a final rule establishing a new test to determine whether a worker is properly classified as an employee or independent contractor under the Fair Labor Standards Act (FLSA). The final rule rescinds a 2021 rule addressing this issue and adopts a six-factor test focused on the "economic reality" of the relationship between a putative employer and a worker. The final rule goes into effect on March 11.
As we previously discussed here, in 2021 the DOL issued an employer-friendly version of the worker classification rule. That rule used a five-factor test to determine whether a worker was properly classified as an employee or independent contractor, with two of those factors considered "core factors" that received more weight than the others.
Following the change of administration, in 2022 the DOL sought to replace the 2021 rule by returning to a standard often used by courts to determine a worker's status as an employee or independent contractor under the FLSA. That standard uses a six-factor analysis to examine whether a worker is, as a matter of economic reality, economically dependent on the putative employer under the totality of circumstances.
With only a few minor variations, the 2024 final rule is substantially the same as the rule the DOL proposed in 2022. Like the 2022 proposed rule, the final rule returns to the totality-of-the-circumstances analysis, which applies a six-factor test, with no factor holding more weight than any other. The DOL also issued a FAQ providing guidance on its interpretation of the application of the six factors. Below are the six factors, along with highlights of the DOL's guidance regarding how they will be applied:
While the final rule establishes six factors, it also hedges by indicating that this is a non-exhaustive list of factors and noting that additional factors may be relevant if such factors demonstrate that the worker is in business for themself or is economically dependent on the putative employer for work.
The final rule relates only to worker classifications under the FLSA. The DOL made clear that the final rule has "no effect on other laws—federal, state, or local—that use different standards for employee classification" because "[t]he 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." Many states (including, for example, New Jersey and Connecticut) have more stringent tests for determining independent contractor status, so employers must ensure that their classification of workers also complies with any applicable state laws.
The final rule makes it more difficult for a worker to qualify as an independent contractor rather than an employee. When the final rule takes effect, the risk of potential misclassification will increase, resulting in heightened potential liability for employers that use independent contractors. In addition, there have been increased enforcement initiatives at the state level to identify and penalize employers that misclassify workers as independent contractors. As such, it is important that employers take action, including auditing their workforce for potential worker misclassifications and implementing policies and procedures to prevent misclassifications in the first instance.
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