DOL’s Final Rule: what it entails and why employers must listen

On January 10, 2024, the US Department of Labor (DOL) published the Final Rule. This is a revision of the DOL’s guidance on the proper standard for analyzing whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA).

In a nutshell, this matters because employees are covered by the FLSA, while independent contractors are not. The FLSA itself does not define independent contractors and its definition of employee leaves significant room for interpretation.

Employers must pay attention to this new guidance to ensure they are properly paying workers. The consequence of not doing so can be potentially steep economic damages.

Note: Workable is not a law firm. This article is meant to provide general information and should be used as a reference. It’s not a legal document and doesn’t provide legal advice. Neither the author nor Workable will assume any legal liability that may arise from the use of this article. Always consult your attorney on matters of legal compliance.

A ‘final’ clarification

The Final Rule replaces the DOL’s 2021 Trump-era guidance. It clarifies that if, in economic terms, a worker relies on an employer for their work and is not in business for themselves, they cannot be considered an independent contractor.

The previous administration’s test aimed to evaluate if a worker operates as their own business, classifying them as an independent contractor, or relies on an employer for work, thus making them an employee.

With the introduction of the Final Rule, the DOL is rescinding the previous guidance and introducing a comprehensive, multi-faceted analysis that considers the entire scope of circumstances around the definition of an employee versus an independent contractor.

As such – companies who work with contractors especially need to pay attention.

Supplemental reading: Biden’s labor agenda: what you need to know as an employer

What does this change mean for employers?

The Final Rule takes effect on March 11, 2024. The DOL’s new guidance is highly politicized, and employers should expect to see legal challenges to the rule and the DOL’s efforts to implement it. Businesses – including Uber and DoorDash – are already pursuing legal action.

It remains to be seen as of February 2024 whether the courts will delay introduction of this rule. Nevertheless, employers, in consultation with legal counsel, should keep the new rule in mind as they audit their existing relationships and plan for future relationships with workers.

If the Final Rule survives, unless your business is entirely staffed by employees (who are paid as such), you should be taking a hard look at your contractors to assess whether they are properly classified under this new guidance.

The Final Rule: 6 factors to look at

In order to determine “economic dependence,” the Final Rule identifies six factors that “should guide an assessment of the economic realities of the working relationship”:

• the opportunity for profit or loss depending on managerial skill
• investments by the worker and the potential employer
• the degree of permanence of the work relationship
• the nature and degree of control
• the extent to which the work performed is an integral part of the potential employer’s business
• skill and initiative (i.e., whether the worker uses specialized skills to perform the work and whether those skills contributed to business-like initiative)

While the DOL emphasizes these six factors in its guidelines, it also notes that additional factors may be relevant to the overall question of economic dependence. No single factor (or set of factors) automatically determines a worker’s status as either an employee or an independent contractor. Employers are encouraged to review each of those factors for their contractors.

But it does not stop there.

Employers must navigate not only the DOL’s guidance under the FLSA, but also applicable state law, which may have different standards for classification under state wage and hour law.

For example, Massachusetts has adopted a form of the ABC test (or three questions) to help answer the employee vs. independent contractor question under the Massachusetts Wage Act.

What about misclassification?

What if an employer realizes they have misclassified a worker? That’s something you want to avoid entirely, but it does happen. The key is to minimize the risk when transitioning an independent contractor to an employee.

Generally, employers will likely find that it is better to properly classify their workers and assume some potential risk associated with that correction than attempt to whistle past the graveyard.

Employers should consult with their employment attorney with questions about classifying workers as employees or independent contractors, the efforts by the DOL to regulate these classifications, and the relevant state law approaches to classification.