Is your worker an employee or an independent contractor? This question has tormented employers over the years due to blurred lines on how to classify workers. The correct classification is integral for determining the manner of compensation and protections granted to each. What remains certain is that the misclassification of a worker will have serious ramifications.
New Rule
On January 10, 2024, the U.S. Department of Labor published a rule (the “New Rule”) in an effort to assist businesses and their workers in analyzing the differences between an employee and an independent contractor under the Fair Labor Standards Act (FLSA). The New Rule rescinded a prior 2021 rule and became effective March 11, 2024.
Economic Realty Test
Unlike prior methods, the New Rule sets forth an Economic Realty Test (the “Test”) to assist with the classification of a worker. The Test directs businesses to consider the following six factors when determining the appropriate classification:
- Opportunity for Profit or Loss: Does the worker have the opportunity for financial gain or loss based on their managerial skills and investment?;
- Investments by Worker and Employer: Are investments made by the worker capital or entrepreneurial in nature?;
- Permanency of Relationship: Is the working relationship between the employer and the worker permanent or temporary?;
- Degree of Control: To what extent does the employer control the work performed by the worker?;
- Integration of Services: How integral are the worker’s services to the employer’s business?; and
- Skill Requirement: What level of skill is required for the work performed?
The Test allows for the consideration of other factors as well if they are relevant to determining a worker’s economic dependence on the employer. Note that no single factor or group of factors is assigned a predetermined weight under the New Rule.
Potential Issues and Challenges
While the goal of the New Rule is to ensure consistency and reduce instances in which workers are misclassified, the New Rule still presents challenges for businesses. There is a lot of discretion given in the interpretation of the factors under the New Rule with limited guidance on how the factors should be weighed or examined.
The use of the Test will likely also increase the already high number of suits by workers, as seen by the recent surge of workers challenging their classifications. That said, the New Rule can help to ensure that businesses comply with the law and provide workers who are employees those benefits afforded them. Importantly, even the unintentional misclassification of a worker can have serious consequences and substantial economic damages.
Brian Boreman heads the firm’s Employment Law practice and is the co-chair of the Litigation department. Daniel LePera is a member of the firm’s Business department. If you have questions about the classification of workers, please contact Brian (bboreman@utbf.com) or Dan (Dlepera@utbf.com) to schedule a consultation.
