By Chris Lamb
On January 10, 2024, the U.S. Department of Labor published a final rule, effective March 11, 2024, revising the Department’s previous guidance on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA). It rescinds the 2021 Trump-era Independent Contractor Rule (2021 IC Rule), replacing it with a different analysis for determining employee or independent contractor status more consistent with longstanding judicial precedent.
As the gig economy and remote work continue to increase, misclassifying employees as independent contractors represents a significant risk for employers who must comply with both federal and state laws. Employers who misclassify employees not only risk denying workers minimum wage, overtime pay, and other protections, but if audited by the government, they also risk significant financial consequences in the form of damages, penalties, back taxes and back pay.
The new rule aims to reduce the risk of employers misclassifying employees as independent contractors and to provide consistent guidelines for businesses that engage with independent contractors.
There are several key ways in which this new rule differs from the former 2021 Independent Contractor Rule, including:
- Returns to a totality-of-the-circumstances economic reality test, where no single factor or group of factors is assigned any predetermined weight;
- Considers six factors (instead of five), including the investments made by the worker and the potential employer;
- Provides additional analysis of the control factor, including a detailed discussion of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the nature and degree of control over a worker;
- Returns to the Department’s longstanding consideration of whether the work is integral to the employer’s business (rather than whether it is exclusively part of an “integrated unit of production”);
- Provides additional context to some factors, including a discussion of exclusivity in the context of the permanency factor and initiative in the context of the skill factor; and
- Omits a provision from the 2021 Independent Contractor Rule, which minimized the relevance of an employer’s reserved but unexercised rights to control a worker.
The Department of Labor has posted a detailed FAQ on its website outlining the substance of the new rule and the analysis guiding whether workers should be classified as employees or independent contractors under the new rule. If you have specific questions about how this rule impacts your business or how to comply, please contact Chris Lamb or another member of Fortis’ employment law team.