The Department of Labor (“DOL”) recently issued its Final Rule defining what it means to be an “independent contractor” under the Fair Labor Standards Act (“FLSA”). The Final Rule goes into effect March 11, 2024.
The FLSA—which requires employers to pay certain employees minimum wage, overtime, and keep accurate time and pay records, among other things—is only applicable to employees, not true independent contractors. However, if a company’s classification of independent contractors does not comply with the DOL’s Final Rule, companies may find themselves exposed to DOL audits, hefty fines, and litigation.
During the Trump Administration, the DOL issued a Final Rule that sought to eliminate confusion among the courts related to classifying workers. Prior to 2021, courts generally looked to several factors to determine whether a worker was truly independent, including nature and degree of control, opportunity for profit or loss depending on managerial skill, investments by the worker, etc. Each factor was given equal weight. The 2021 Final Rule referred to the same factors, but deemed two factors—nature and degree of the individual’s control over the work and the individual’s opportunity for profit and loss—as “core” factors and more determinative of an employer-employee relationship. The 2021 Final Rule was generally regarded as more “employer friendly.”
Since then, the Biden Administration has been focused on revising that rule and reverting to the “economic realities test” where no one factor controls. However, the manner in which the 2024 Final Rule has defined these factors is likely to make classifying workers as independent contractors more difficult. For example, a worker’s “skill and initiative” doesn’t just look to whether the worker needs specialized skills in order to do the job, but whether the skills required reflect the worker’s skills “in connection with business-like initiative.” Further, “degree of control” goes beyond the business’ control over the manner in which the work is performed to include restrictions on the worker’s ability to work for others or “economic restrictions.”
Why does it matter
Although it is likely that the 2024 Final Rule will be challenged, businesses would be wise to consult with competent legal counsel regarding their current classifications. Taking a more holistic approach to the ways in which the business uses and governs their independent contractors is likely to go a long way in making a strong case for proper classification should the DOL come knocking. Employers may also want to review their existing independent contractor agreements to be more clear on the expectations and nature of the work.
It is worth noting that the DOL’s Final Rule only relates to enforcement of the FLSA and does not apply to other federal laws, including the National Labor Relations Act or anti-discrimination laws. Moreover, legal precedent within a particular Circuit is still controlling, though the Final Rule may be used to persuade courts when deciding whether certain workers are properly classified.