Employee or Independent Contractor? New Guidance Issued by the Department of Labor
Client Alert
On January 9, 2024, the U.S. Department of Labor (DOL) issued its long-awaited final rule — effective March 11, 2024 — revising its prior interpretation of worker classifications under the federal Fair Labor Standards Act (FLSA).
The new final rule rescinds the standard previously established in 2021, in turn, shifting the analysis of whether a worker is an employee (versus an independent contractor) of a business from a more streamlined “economic reality” test to a more complex “totality of the circumstances” standard.
Understanding and correctly applying this new analysis is critical given the implications of worker misclassification under the FLSA — employees are entitled to minimum wage, overtime pay, and other benefits, whereas independent contractors are not entitled to such benefits but enjoy greater flexibility and independence.
Under the new standard, the following non-exhaustive list of factors will be taken into consideration:
- The opportunity for profit or loss a worker might have based on their skillset (i.e., factors that impact a worker’s economic success or failure);
- The financial state and nature of any resources (e.g., capital or entrepreneurial) a worker has invested in the work;
- Degree of permanence of the work relationship (i.e., whether the work relationship is indefinite versus temporary in nature);
- The degree of control an employer has over the person’s work (e.g., who sets the worker’s schedule, who oversees and/or directs performance, and whether the worker can maintain other jobs);
- Whether the work the person does is essential (i.e., critical, necessary, or central) to the employer’s business; and
- The worker’s skill and initiative, including whether the worker contributes to business-like initiatives.
While the above analysis is, again, limited to worker classifications under the FLSA, it is very likely to have a significant impact going forward as, per the DOL, the final rule is intended to stretch broadly across all industries to “reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.”
The new final rule, while not controlling law, will inevitably serve as persuasive guidance in federal misclassification cases.
For additional information on the new DOL guidance or how it may impact your company, please reach out to Monica Andress at (330) 253-9153 or mbandress@bmdllc.com, or any member of the Labor and Employment Team of Brennan, Manna & Diamond LLC.