On January 9, 2024, the US Department of Labor (DOL) issued a final rule that provides revised guidance on whether a worker is properly classified as an employee or independent contractor under the Fair Labor Standards Act (FLSA). Under the FLSA, employees are entitled to minimum wage and overtime pay, while independent contractors are not. The DOL’s new rule is slated to go into effect on March 11, 2024.
The DOL and courts have traditionally used the “economic realities” test to assess whether workers are economically dependent on the employer for work or are in business for themselves. The final rule, which is consistent with the proposed rule issued on October 11, 2022, requires that each factor in the economic realities test must be considered equally. The six primary factors are:
- the worker’s opportunity for profit or loss;
- the amount of investment by the worker;
- the permanency of the working relationship;
- the nature and degree of the employer’s control over the work;
- whether the work is an integral part of the employer’s business; and
- the worker’s skill and initiative.
Under the previous rule issued by the Trump administration in 2021, two “core factors” in the economic realities test—the worker’s opportunity for profit and loss and the degree of the employer’s control over the work—were given greater weight (and a more expansive interpretation), making the test more employer-friendly. The reframing of the analysis back to equal consideration of all factors may make it more likely that workers will be found to be employees entitled to protections under the FLSA. The DOL’s new rule reflects a continuing focus on this issue under the current administration. For example, in June 2023, the National Labor Relations Board issued a decision reverting to its previous test for determining whether workers are employees covered by the National Labor Relations Act (“NLRA”), or independent contractors who are not, moving from focusing on “entrepreneurial opportunity” to applying its previous multifactor test.
The stakes will be high in any lawsuit brought by alleged employees under the new rule. Workers who claim they were misclassified as independent contractors may pursue claims for up to two years (three years for willful violations of the law) of unpaid overtime and minimum wages. Additionally, successful plaintiffs may obtain liquidated damages and attorneys’ fees. Lawsuits under the FLSA are often brought as collective actions, on behalf of large groups of employees, raising the potential for significant liability for businesses who misclassify workers.
Employers in the gig economy and in traditional businesses who use independent contractors should review their practices in light of the new rule.
Ballard Spahr’s Labor and Employment Group frequently advises employers on issues related to whether workers are appropriately classified as employees or independent contractors under the FLSA and other employment laws, including conducting classification audits, and we also defend employers in misclassification litigation. Please contact us if we can assist you with these matters.