Be aware of new classification of employee vs. independent contractor from labor department

Employee or independent contractor? That’s the question the Department of Labor addressed Jan. 10 when publishing its revised final rule on classifying workers as an employee vs. an independent contractor under the Fair Labor Standards Act (FLSA).

The new rule took effect March 11.

“There is no reason for employers to hit the panic button—just be aware that the pendulum has swung back in favor of classifying workers as employees rather than independent contractors,” says AOA General Counsel Michael Stokes, Esq.

“If you know that your practice has some ‘close call’ situations in which you had a difficult time deciding how a worker should be classified, or if you made changes based on the prior rule change that was enacted in 2021, it would be a good idea to revisit those issues.”  

Here are some answers to common questions about the final rule.

What is the Final Rule for Employee or Independent Contractor Classification under FLSA, and why is it significant? 

The rule, which takes effect on March 11, sets out the guidelines for when the Department of Labor (DOL) would consider a worker to be an employee of a company, rather than an independent contractor. Employers must pay the employer’s share of FICA taxes for employees. In addition, tax withholding, workers’ compensation insurance and a host of other issues come into play when an individual is an employee of a company, rather than an independent contractor. This is important because lawsuits and enforcement actions related to worker misclassification are both common and costly for employers. Courts look to the DOL rules for guidance on how to dispose of cases brought before them. In addition, an employee can bring a wage claim with the Department of Labor Wage and Hour Division. Further, the DOL can bring its own enforcement actions against employers.    

How is the new rule different than the 2021 guidance? 

The 2021 rule attempted to simplify the classification question somewhat and was viewed as more favorable to employers and individuals who wished to work as independent contractors. In the 2021 rule, the DOL indicated that it would give greater weight to two factors: the nature and degree of control over the work and the worker’s opportunity for profit or loss. The DOL stated that when these two factors both weighed in favor of a certain classification, there was a “substantial likelihood” that the classification was correct. The most recent changes revert back to more of a totality of the circumstances test, in which no one factor is given greater weight. The change is viewed favorably by workers’ rights groups, including organized labor, and others who wish to see more workers classified as employees and receiving the legal protections extended to employees rather than independent contractors.  

Why was the rule revised? 

The 2021 rule was adopted in the final weeks of the prior presidential administration. Upon taking office, the new administration attempted to immediately revert back to the prior rule. This effort was tied up in court, and ultimately did not take effect until this year (2024).  

How will it impact my practice? 

Probably not much. However, you may want to consult with your attorney if either of these two situations apply to you: (1) you made changes to your practice’s worker classifications based on the changes in the 2021 rule—if this is the case, you may need to revert back to your prior practice due to the effective rescission of the 2021 rule; (2) you know that your business takes an “aggressive” approach with regard to worker classification. The 2024 rule, while it may only be reverting back to the status quo ante (previous state of affairs) that existed prior to 2021, indicates that the DOL will be taking a harder line against companies that misclassify employees.

“The DOL’s Final Rule on Employee and Independent Contractor Classification will make it more likely that certain workers classified as independent contractors will need to be reclassified as employees and be eligible for minimum wage, overtime and possibly other benefits or face possible misclassification penalties including significant fines, additional taxes, back pay and other amounts,” says Benjamin Woodard, partner, Stinson LLP, St. Louis. 

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