On January 9, 2024, the US Department of Labor issued a Final Rule on Employee or Independent Contractor Classification under the Fair Labor Standards Act, returning to its prior multi-factor test for worker classification.
In with the old and out with the new
The “new” Final Rule isn’t so much new as it is a return to previous guidance of the DOL. It sets forth the following six factors (instead of the previous five) that should be considered when evaluating worker classification:
(1) opportunity for profit or loss depending on managerial skill;
(2) investments by the worker and the potential employer;
(3) degree of permanence of the work relationship;
(4) nature and degree of control;
(5) extent to which the work performed is an integral part of the potential employer’s business; and
(6) skill and initiative.
The goal of the inquiry remains the same: ascertaining whether a worker is, as a matter of economic reality, dependent on the hiring party for work and therefore an employee. The Final Rule provides detailed explanations of the meanings of each of factor and guidance on how the factors should be applied. Most importantly, it specifies that no one factor should be considered more determinative than any of the others. The Final Rule also provides that additional factors may be considered if they are probative of whether the worker is economically dependent on the hiring party.
Why now? Didn’t they just issue a final rule in 2021?
The Final Rule rescinds the 2021 Independent Contractor Final Rule which the Department of Labor believes is inconsistent with case law and previous guidance on work status.
The elements of the previous Final Rule that the DOL found to be flawed were: (i) its emphasis on the two “core” factors of control and opportunity for profit and loss, (ii) its evaluation of worker investment and initiative solely under the opportunity for profit and loss factor, and (iii) failure to consider whether the work performed is central to the hiring party’s business.
Additionally, the DOL stressed the necessity of returning to an interpretation and application of the multifactor economic realities test as a “totality-of-the-circumstances-test” (as opposed to one with two core factors that are given greater weight than the others) in order to avoid confusion and divergence from longstanding case law.
What does the final rule apply to?
The Final Rule only applies to the Department of Labor’s approach to worker classification in establishing whether a hiring party is responsible for complying the wage and hour standards and other requirements of the FLSA. It does not affect any other state, federal or local law nor does it preempt any other laws. It’s important to note that federal, state and local government and administrative agencies all apply different tests in determining worker classification.
Consequences of misclassification under the FLSA
Hiring parties who have misclassified their workers may be held liable for failure to comply with the requirements of the FLSA including minimum wage and overtime pay. Remedies available under the FLSA include back pay in the amount of unpaid minimum wages or overtime compensation, attorney’s fees and costs, injunctive relief and civil and criminal penalties.
When does this go into effect?
The Final Rule goes into effect March 11, 2024.
