The U.S. Department of Labor (DOL) issued a Final Rule effective today, March 11, 2024, that provides employers with a framework for analyzing whether the worker they just hired should be classified as an employee or an independent contractor under the Fair Labor Standards Act (FLSA). This is the latest attempt to clarify the difference between these two types of workers in the labor law context.
Whether someone performing work for your company is an employee or contractor can affect your payroll, taxes, the benefits you must offer them and other factors. Treating an employee as a contractor, or vice versa, or misclassifying your workers can have serious legal consequences. So it is wise to be deliberate and accurate about worker classification.
Improperly classifying a worker can be expensive
An employer who improperly classifies a worker as an independent contractor may find that they have unintentionally violated minimum wage requirements or owe unpaid overtime wages. Fines and penalties accumulate quickly and attorney fees are frequently awarded to the employee in these situations. Moreover, if you have misclassified one employee, most likely there are other workers who have similar claims. And it is not a defense that the worker asked to be treated as an independent contractor.
What is the difference between employees and independent contractors under the FLSA?
A worker who is classified as an employee within the meaning of the Fair Labor Standards Act (FLSA), then that worker will be entitled to minimum wage and overtime pay protections. Workers classified as independent contractors subsequently are not entitled to these benefits.
Some typical differences between employees and independent contractors include:
- An employee typically has one employer, while a contractor may do work for several companies.
- An employee’s hours are generally set by their employer, while an independent contractor often sets their own work hours.
- An employee usually does not pay the costs of their work duties out of pocket, or the employer reimburses them if they do. An independent contractor may have to absorb these costs themselves.
As these examples suggest, the employer usually has close control over the time, place and manner in which an employee does their job, and less so for a contractor.
The new ‘economic reality’ test
An employer must now analyze the “economic reality” between the employer and the worker. By employing a totality-of-the-circumstances test that was previously used by the courts, the DOL (Department of Labor) wants the determination to turn on whether or not the worker is economically dependent upon the employer. This test has six equal factors that need to be considered when analyzing the economic realities of the working relationship. These factors are:
- opportunity for profit or loss depending on managerial skill, such as whether the worker has the option to accept or decline a specific task;
- investments by the worker or the employer, such as whether the worker pays for their own equipment and advertising, or the employer handles those costs;
- degree of permanence of the work relationship, such as an ongoing job with no definite end date, versus one that is based on a particular project being completed or until a specific date is reached;
- nature and degree of control the employer has over the worker, such as whether the employer sets the worker’s pay rate and schedule, monitors the worker’s performance and has the power to punish them;
- extent to which the work performed is an integral part of the employer’s business, meaning, how critical and central the work is to the business; and
- skill and initiative, or the extent to which the worker applies specialized skills and uses their own initiative to generate business for themselves.
No one factor or subset of factors determines if a worker is an employee or independent contractor. Rather, all the circumstances of the relationship should be examined. Also, additional information may be relevant if it in some way indicates if the worker is in business for themself as opposed to being economically dependent on the employer for work. For example, does the worker have their own insurance?
Find out your legal position as an employer in Philadelphia
If you have any questions regarding worker classification, or any other aspect of your business, please feel free to contact any of our business attorneys at Anderson Leavitt.
This entry is presented for informational purposes only and is not intended to constitute legal advice.