DOL Final FLSA Worker Classification Rule In Effect As Of Mar 11, 2024

The Department of Labor announced a final rule on independent contractors in January. The new ruling is expected to make it more difficult to classify workers as independent contractors.

It introduces a new standard that uses a totality-of-the-circumstances analysis of the economic reality test to determine whether workers are in business for themselves.

Fair Labor Standards Act (FLSA)

There are two types of employees: “exempt” and “non-exempt.” According to the Fair Labor Standards Act (FLSA), an exempt employee is not entitled to overtime pay and other protections. Nonexempt employees must be paid minimum wage and overtime, provided breaks, and protected by the FLSA rules.

Under the existing rules, non-exempt employees are entitled to overtime pay and other benefits protected by the FLSA, while exempt employees are not.

Some jobs are classified as exempt by definition. For example, “outside sales” employees are exempt (“inside sales” employees are nonexempt). Some states, like California, have their own lists of exempt and non-exempt employees. For most employees, however, whether they are exempt or nonexempt depends on:

The New Standard

Although the new rule introduces six factors that determine whether a worker is an independent contractor, it sets the totality-of-the-circumstances analysis of the economic reality test as the deciding issue rather than using “core factors.” The DOL states that “economic dependence is the ultimate inquiry, meaning that a worker is an independent contractor as opposed to an employee under the [FLSA] if the worker is, as a matter of economic reality, in business for themself.

The six factors that guide the worker’s relationship with an employer:

1. Opportunity for profit or loss a worker might have
2. Investments in the equipment made by the worker
3. The degree of permanence of the work relationship
4. The degree of control an employer has over the work
5. Whether the work is essential to the employer’s business
6. The worker’s skill and initiative

Employers Face Much Higher Benefit Costs

As employers face the possibility of adding new “employees” to a company’s payroll to eliminate, the confusion over multiple tests will have potentially far-ranging consequences.

Under the Affordable Care Act, for instance, an employer with the equivalent of at least 50 full-time employees must offer health coverage that meets minimum standards and doesn’t cost more than 8.39% of employees’ household income in 2024—or the employer is subject to large fines.

If more workers are classified as ‘employees,’ those individuals will count towards the totals that employers have to cover under their group health plans, as required by the Affordable Care Act. This would greatly impact smaller businesses previously left untouched by these ACA requirements.

Reclassification could also affect company leave policies, including the need to cover more newly minted “employees” under the federal Family and Medical Leave Act. The act provides up to 12 weeks of unpaid leave for a new child or to take care of one’s own or a family member’s medical needs.

FMLA should be available to workers at a location where the employer has at least 50 employees within 75 miles.

However, changes at the state level have bigger potential benefits. A patchwork of state and sometimes local laws governs paid sick leave and family leave, leaving the door open for newly classified employees to trigger coverage.

Thirteen states plus Washington, D.C., for example, now guarantee workers at least 12 weeks off annually in paid family and medical leave. However, the new DOL rule is somewhat ambiguous in this context.

This rule only applies to the Fair Labor Standards Act. The Department of Labor does not enforce the Affordable Care Act,” which generally uses a common law definition of employee, and ACA penalties are levied under tax law.

Finally, this decision opens new interpretations to courts when settling labor arbitration, worker lawsuits, and legal challenges related to the new rules.

This story was sourced from the DOL, Bloomberg Law, and HRWatch.