Out with the old…in with the new. On January 10, 2024, the U.S. Department of Labor (“DOL”) released a new final rule (the “new rule”) regarding classification of workers under the Fair Labor Standards Act (“FLSA”). The new rule replaces a Trump administration rule and returns to a six-factor test in determining whether, as a matter of law (regardless of any label or agreement), a worker is an employee or an independent contractor. This matters very much to all employers, large and small, because the FLSA applies to all employers. Furthermore, state wage laws, including North Carolina’s Wage and Hour Act, are modeled on and/or incorporate portions or aspects of the FLSA. An employer’s misclassification of a worker as an independent contractor when the worker is legally an employee can have very expensive consequences.
What’s Different About the New Rule?
The previous rule determined classification based on two core factors: (1) the nature and degree of a worker’s control over the work; and (2) the worker’s opportunity for profit and loss. The new rule, however, has returned to a pre-2021 six-factor determination process. The Economic Reality Test evaluates multiple factors to determine appropriate classification:
- The worker’s opportunity for profit or loss.
- Relative investments by the worker and the potential employer.
- Permanence of the work relationship, considering the nature and duration of the relationship.
- Degree of control the potential employer has over the worker. This factor includes control over the worker’s schedule, supervision of the worker’s performance, and how much influence the worker has over pricing and marketing. Importantly, the new rule strictly considers whether the potential employer has the ability to control these factors, rather than whether it chooses to exercise control over these factors.
- Whether the work performed by the worker is integral to the potential employer’s business.
- Whether the worker must possess specialized skills or relies on training provided by the potential employer.
How Do the Changes Affect Employers?
While the previous rule was considered more business-friendly, the new rule makes it more likely that workers will be determined to be employees, rather than independent contractors. Worker classification may affect the worker’s compensation structure, benefits options, and tax obligations. Additionally, workers classified as employees may be subject to additional employment laws and regulations, including overtime and minimum wage requirements.
The new rule becomes effective on March 11, 2024. Employers should act now to determine whether their worker classifications will be affected.
If you have questions about your or your employees’ classification under the new rule, please contact any member of Gardner Skelton’s employment team.