Beginning on March 11, 2024 a new rule goes into effect changing how businesses will classify their workers. Last month, the U.S. Department of Labor (DOL) announced the final rule for classifying workers as employees or independent contractors under the Fair Labor Standards Act (FLSA). The new rule largely reverses the “core factors” test put into place during the Trump Administration.
The new rule is a return to the status quo, effectively reinstating the “economic reality” test long relied upon by the courts. The new rule requires courts to consider six factors in determining whether a worker is an employee or independent contractor. These factors are:
- the worker’s opportunity for profit or loss;
- investments by the worker and the potential employer;
- how permanent the relationship is;
- the nature and degree of control the business has over the worker;
- whether the work is an integral part of the business; and
- whether the work requires specialized skills.
No single factor is dispositive and the list not exhaustive. Each determination must be made by reviewing the totality of the circumstances. This means other considerations might be relevant and may be relied upon when classifying workers.
One thing the rule makes clear, though, is that a worker is not an independent contractor if the worker is economically dependent on the business for work.
The DOL anticipates that this rule will reduce the risk that employees are misclassified as independent contractors. Misclassification may deny workers minimum wage, overtime pay, and other protections that are afforded to employees but not independent contractors. Misclassification can also lead to severe penalties against the business itself.
It’s important to note that the new rule applies only to applications of the FLSA. It has no impact on any state wage and hour laws that do not follow the FLSA (including those states applying the “ABC Test”). Similarly, the new rule does not extend to other federal statutes, such as the Internal Revenue Code or National Labor Relations Act. With this in mind, businesses should continue to periodically review their workforce programs and practices to ensure proper classification of workers in all applicable contexts.
Kyler Mejia is an attorney (bar admission pending) with Caritas Law Group, P.C. Kyler advises nonprofit and socially responsible businesses on corporate, trademark, tax, and fundraising regulations nationwide as well as donors concerning major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form.