March 13, 2024

Are Your Workers Properly Classified? Navigating DOL’s New Independent Contractor Rule is Crucial for Your Business’s Compliance and Future Success!

Employers, DON’T DELAY in reviewing the Department of Labor’s (DOL) Final Rule redefining the classification of “independent contractors” under the Fair Labor Standards Act (FLSA) –which took effect on Monday, March 11, 2024. Organizations must ensure they are aware of the Final Rule, as the DOL issued its ruling with the aim of reducing “the risk that employees are misclassified as independent contractors.”  

In issuing the Final Rule on January 10, 2024, the DOL Wage and Hour division highlighted that the 2021 Independent Contractor Rule (“Prior Rule”) was fully rescinded on the basis that the Prior Rule is “out of sync with longstanding judicial precedent and increased the likelihood of misclassification.” For background, the FLSA was enacted by Congress in 1938 to create worker protections related to minimum wage, overtime pay, child labor, and record-keeping requirements. If an organization hires only independent contractors instead of employees, no employment laws, including the FLSA, would apply.   

Hiring independent contractors is desirable for many businesses because there are no wage and hour concerns, such as overtime pay, employment taxes, no benefits costs, and, overall, a flexible relationship. Employers must exercise caution, however, because the independent contractor classification under the FLSA is narrowly interpreted. It is also important to highlight that employers found violating the FLSA’s employee versus independent contractor classification rule may be subject to paying back wages, including overtime, reimbursement for out-of-pocket expenses, penalties, and possibly liquidated damages.   

In other words, employee misclassification is a common and often expensive mistake. As such, organizations must understand the new DOL guidance to properly assess and ascertain if there is a risk of misclassification and ensure adherence with the FLSA.   

Redefining “Independent Contractors” under FLSA  

In the Prior Rule, the traditional approach in evaluating whether a worker was to be classified as an employee or an independent contractor focused primarily on giving weight to two core factors: (1) the nature and degree of control, and (2) the opportunity for profit or loss, even if other factors did not support an independent contractor conclusion. The 2021 rule also prohibited considering whether the work performed is central or important to the potential employer’s business.   

In contrast, The Final Rule returns to a totality-of-the-circumstances analysis, in which the following six economic reality factors are to be considered and do not have a predetermined weight: (1) the opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the potential employer; (3) the degree of permanence of the work relationship; (4) the nature and degree of control; (5) the extent to which the work performed is an integral part of the potential employer’s business; (6) skill and initiative.   

Simply put, the Final Rule reiterates that economic dependence is the ultimate inquiry into whether a worker is an employee or an independent contractor. In other words, a worker is an independent contractor if the worker is, as a matter of economic reality, in business for themselves. It’s crucial to note that no single factor carries predetermined weight, and they should be assessed collectively. Additionally, the Final Rule emphasizes that, just as under the Prior Rule and in accordance with longstanding precedent and guidance, additional factors may also be considered if they are relevant to the overall question of economic dependence.   

Employer Impact:  

The Final Rule represents a pivotal shift in how businesses classify their workers, aiming to alleviate the burdens of misclassification while offering clarity in engaging with independent contractors. However, the test may create more questions than answers, and the consequences of misclassification can be intimidating, carrying hefty penalties and unnecessary headaches for any business owner.  

As the legal landscape continues to evolve, it’s crucial for employers—especially those heavily reliant on independent contractors—to address the potential pitfalls and assess the impact of the Final Rule. If you haven’t taken action yet, now is the time to act. 

The first step is to contact me to arrange a comprehensive worker classification audit aligned with the new framework. By conducting a thorough audit tailored to your business’s needs, we can identify potential areas of concern and implement strategies to ensure compliance with the Final Rule. This is an important and proactive step toward safeguarding your business’s future and mitigating any risks associated with misclassification. 

Your Trusted Legal Advisor:   

Understanding and adhering to the DOL’s Final Rule is paramount for businesses to navigate the evolving landscape of labor and employment law. If this new change feels overwhelming, don’t worry—you are not alone. As your partner in the process, I stand ready to assist you in ensuring compliance and addressing any concerns.  

Reach out today to take steps toward compliance and peace of mind. Your proactive approach today will pave the way for your business’s success tomorrow.   

Talya Haas, Esq.
Attorney, Labor & Employment
Kelley Kronenberg-Fort Lauderdale, FL.
(954) 370-9970