New Department of Labor rule clarifies independent-contractor status

Labor Paper readers very rarely face misclassification since almost all work under collective bargaining agreements. But they may occasionally share job sites with day laborers or subcontractors who work without labor agreements – or even the basic protections of the U.S. Fair Labor Standards Act.

So a new U.S. Department of Labor rule about whether a worker is truly an independent contractor or an employee may be relevant. Plus, the change is consistent with federal law, reasonable, and neutral regarding the balance between business and workers.

In fact, even the announcement issued by the department on Jan. 11 was framed to stress its logic and value for law-abiding companies: “Final rule will help employers distinguish between employees and independent contractors,” helping honest companies how to accurately determine whether a worker is an employee or independent contractor under the FLSA.

“Independent contractors in business for themselves play an important role in our economy,” the DOL said, “and this rule won’t change that. What it will do is ensure employees receive the protections and benefits they are due.”

Effective March 11, 2024, the revision of the existing rule clarifies government guidance on how to analyze who is an employee or independent contractor. This final rule rescinds the Trump administration’s Independent Contractor Status Under the Fair Labor Standards Act rule published Jan. 7, 2021, and replaces it with an analysis more consistent with the FLSA as interpreted by longstanding judicial precedent.

“The misclassification of employees as independent contractors may deny workers minimum wage, overtime pay, and other protections,” the DOL reminded the country. “This final rule will reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses.”

By law, DOL’s Wage and Hour Division protects workers’ rights. To do so effectively, according to Wage and Hour Division administrator Jessica Looman, “We must help businesses and workers understand how to differentiate employees from independent contractors who are in business for themselves … to provide guidance on whether a worker is an employee or independent contractor under the FLSA.

“This rule will help to ensure that workers who are employees are paid the minimum wage and overtime due them, and that responsible employers that comply with the law are not placed at a competitive disadvantage when competing against employers that misclassify employees.

The final rule revises DOL’s guidance by returning to the multi-factor, totality-of-the-circumstances analysis to assess whether a worker is an employee or an independent contractor under the FLSA; explaining that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors; and using the longstanding interpretation of the economic-reality factors.

Specifically, the factors to decide if companies are complying with the law are:

* Opportunity for profit or loss depending on managerial skill,

* Investments by the worker and the employer,

* Permanence of the work relationship,

* Nature and degree of control,

* Whether the work performed is integral to the employer’s business, and

* Skill and initiative.

“The 2021 Independent Contractor Rule was out of sync with longstanding judicial precedent and increased the likelihood of misclassification,” Looman continued. “The new rule’s realignment of the department’s guidance with judicial precedent will reduce confusion, improve compliance and better protect working people.”

Employers violating the rule – that is, federal law – face significant penalties, according to labor lawyers:

1. Wage, tax, and employment-eligibility violations

2. Tax and payroll fines

3. Legal and punitive damages

4. Back payments to re-classified workers

5. Reputation damage

“Proper classification of employees and independent contractors results in workers who are employees under the FLSA receiving the hard-earned wages and protections they’re legally entitled to, while also ensuring that independent businesses continue to thrive,” Looman added. “Employees across industries and workplaces should have access to both flexibility and essential worker rights.”

It’s the law. Report suspected violations that can undercut honest contractors and other employers.