On January 10, 2024, the United States Department of Labor (“DOL”) released its final federal rule updating DOL’s guidance on how to classify an individual as an employee or independent contractor under the Fair Labor Standards Act. This new final rule will be effective as of March 11, 2024. This final rule is intended to prevent worker misclassification – which has the potential to impact overtime pay and minimum wage requirements, and which can lead to wage theft.
This new final rule rescinds the prior 2021 Independent Contractor rule that the DOL believes was inconsistent with prior precedent – and reinstitutes the multifactor standard used by courts. This final rule establishes that a worker is not an independent contractor if they are economically dependent on the employer for work. The final rule applies the following 6 factors to determine employee vs. independent contractor status:
(1) Opportunity for profit or loss depending on managerial skill;
(2) Investments by the worker and the potential employer;
(3) Degree of permanence of the work relationship;
(4) Nature and degree of control;
(5) Extent to which the work performed is an integral part of the potential employer’s business; and
(6) Skill and initiative. None of the above factors have a specific and predetermined weight, and additional factors may be considered as well. The specific DOL final rule can be reviewed at the following site:
Additionally, DOL issued a set of Frequently Asked Questions (“FAQs”) to accompany this new final rule. A copy of these FAQs can be found at the following site:
FAQ #10 is particularly relevant as it explains the significant differences between this final rule and the prior 2021 Independent Contractor rule that it rescinds.
FAQ #10 is reproduced here for reference: 10.
How does the final rule differ from the Department’s 2021 Independent Contractor Rule? This final rule differs from the guidance provided in the 2021 Independent Contractor Rule in several important ways. Specifically, consistent with the approach taken by federal courts, this final rule:
• 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. With these features, the final rule’s guidance aligns with the analysis currently applied by courts, providing greater consistency for workers and businesses alike.
The DOL also issued a useful “Small Entity Compliance Guide” that contains an overview of the final rule – including an analysis of the 6 factors detailed above. Here is a link to the Guide:
It is important to note that an employee cannot waive their rights under the Fair Labor Standards Act by signing an independent contractor agreement.
Lastly, if an employee is improperly classified as an independent contractor, the employer will be responsible for the payment of unpaid wages owed – and the employer may be required to pay liquidated damages which could include back wages, civil monetary penalties, and attorneys’ fees.
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This Legal Briefing is intended for general informational and educational purposes only and should not be considered legal advice or counsel. The substance of this Legal Briefing is not intended to cover all legal issues or developments regarding the matter. Please consult with an attorney to ascertain how these new developments may relate to you or your business. © 2024 Law Offices of Pullano & Farrow PLL