The United States Department of Labor (DOL) issued a Final Rule effective today, March 11, 2024, that provides employers a framework to analyze if the worker they just hired should be classified as an employee or as an independent contractor. First, why does this classification matter?
Employees And Not Independent Contractors Are Protected Under The Fair Labor Standards Act
If a worker 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 are not entitled to these benefits.
Economic Reality Test: Is My Worker An Employee Or An Independent Contractor?
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 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;
- investments by the worker and the employer;
- degree of permanence of the work relationship;
- nature and degree of control the employer has over the worker;
- extent to which the work performed is an integral part of the employer’s business; and
- skill and initiative.
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?
Improperly Classifying A Worker Is 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.
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.