Department of Labor Issues Final Rule on Employee v. Contractor Classification

Proper classification of workers as employees or independent contractors is incredibly important for all businesses and the U.S. Department of Labor (“USDOL”) has just issued a final rule that makes it more difficult for business to classify individuals as independent contractors.

The final rule was published on January 10, 2024, and goes into effect March 11, 2024. It revises the USDOL’s guidance on how to analyze who is an employee and who is a contractor under the Fair Labor Standards Act (“FLSA”). The prior guidance, published during the Trump Administration, focused on only two factors: (1) the nature and degree of the worker’s control over the work, and (2) the worker’s opportunity for profit or loss.

The new rule returns us to the totality of the circumstances test that was previously applied. This test requires consideration of six factors: (1) the worker’s opportunity for profit or loss, (2) investments by the worker and the potential employer, (3) how permanent the work relationship is, (4) the nature and degree of control over the work, (5) whether the work is integral to the potential employer’s business, and (6) the skill and initiative required by the work.

Employees are entitled to more protections and rights under the FLSA than independent contractors such as minimum wage and overtime pay. This change signals an effort to combat the misclassification of workers as independent contractors and that courts will more often rule in favor of there being an employment relationship.

Misclassification can result in severe and expensive penalties including unpaid minimum wages and overtime, liquidated damages, and attorney fees. Employers should consider their current classifications and implement procedures and checklists to ensure contractor relationships are structured and maintained in a compliant manner. If you have any questions on worker classification and compliance with federal and state rules don’t hesitate to reach out to Milgrom & Daskam’s Employment Law team!