In with the Old: Department of Labor Reinstates Prior Independent Contractor Classification: Employers Beware!
January 30, 2024
By: Adrian P. Castro
With the change of a Presidential administration, there are always changes in policies. This is particularly so when the change involves a different political party and especially in the present contentious environment. When President Trump took office, he quickly withdrew the salary thresholds for exempt workers implemented by the U.S. Department of Labor under the Obama Administration, and the U.S. Department of Labor under his leadership issued a new rule with a much lower salary threshold. Similarly, the Department of Labor under the Biden Administration recently replaced the Trump-era standards for independent contractors with standards which are likely to make it more difficult to prove that a worker is an independent contractor, rather than an employee. In this post, Adrian Castro of the FW Employment Department tells us about the new standards for independent contractors.
On March 11, 2024, the U.S. Department of Labor (“DOL”) will reinstate a standard utilized by the agency prior to 2021 to classify independent contractors, revoking a clearer rule implemented under the Trump administration. Returning to this older standard has the potential to increase misclassification lawsuits, as this standard imposes more factors on employers with respect to classifying workers.
Starting March 11, 2024, employers will be subject to a “totality of the circumstances” analysis to determine whether a worker is an employee or an independent contractor for purposes of the Fair Labor Standards Act (“FLSA”). This test focuses on six factors, none of which carry greater weight:
- An employer’s degree control on the work to be performed;
- The worker’s opportunity for profit or loss depending on their managerial skill;
- The amount of skill and initiative required by a worker in the performance of the work;
- The degree of permanence of the working relationship;
- The worker's investment in equipment or materials required for the task versus the utilization of the employer’s equipment or materials; and
- The extent to which the service rendered is an integral part of the employer's business.
With respect to the control factor, which has historically been subject to greater focus by Courts and the DOL, the new rule provides additional commentary on how to analyze this factor, including a focus on scheduling, supervision, compensation, and the ability to freelance.
Since no one factor carries greater weight, the DOL and Courts will look at the totality of all the above factors to determine whether a worker is an employee or independent contractor. This approach makes it more difficult for an employer to immediately classify a worker one, as opposed to the bright line rule presently in effect that focused on the factors of control and opportunity for profit and loss. Note the existence of an independent contractor agreement, or the desire of the parties to work within an independent contractor, is immaterial to either analysis.
Misclassification carries significant risks. Employees are entitled to minimum wage, overtime, and a number of other benefits, under federal and state law. Misclassified employees are entitled to not only seek payment of any missed benefits associated with misclassification, but they also may be entitled to penalties and the payment of their attorney fees under federal and state law. Significant misclassification across multiple employees may also result in either state or federal agency action, which carries additional concerns.
The so-called “gig economy” is particularly threatened, such as Uber and delivery-based services. In addition, the rule is expected to impact the construction, transportation, trucking, and media industries given the high use of independent contractors in those sectors.
Moving forwards, Employers should put in additional time and effort to analyze all new worker arrangements to determine whether the proposed relationship can be classified as an independent contractor relationship. If not, the worker must be treated as an employee. In addition, any independent contractor relationships entered into over the last few years should be reanalyzed to ensure compliance. To the extent you require any assistance in performing either analysis, please feel free to contact Fairfield and Woods to discuss.