DOL Sets New Independent Contractor/Employee Classification Test Under the FLSA

The U.S. Department of Labor’s (DOL’s) long-anticipated final rule outlines the factors employers should use to determine whether workers are properly classified as employees, who are subject to the wage protections of the Fair Labor Standards Act (FLSA), or independent contractors, who are not. The new rule takes effect on March 11.

The new rule’s focus is to combat what the DOL calls a serious problem of employers misclassifying employees as independent contractors and denying their rights to minimum wage and overtime under the FLSA. Misclassification can result in serious liability for employers under the FLSA for recovery of back wages. It can also involve civil and criminal liability for nonpayment of payroll taxes for employees under the Internal Revenue Code.

This rule rescinds a 2021 independent contractor test issued under former President Donald Trump, which the Biden administration DOL viewed as too employer-friendly and inconsistent with the FLSA and judicial precedent.

The new six-factor rule is essentially a return to the analysis traditionally used by the courts to determine whether a worker is an independent contractor, who is in business for themselves, or an employee, who must receive at least the minimum wage and overtime pay for all hours worked over 40 in the workweek. The various factors look at the relationship between the worker and the employer, with no one factor being more important than others, and being viewed under the totality of the circumstances. The factors include:

1. 1. The degree to which the employer controls how the work is done.
   2. The worker’s opportunity for profit or loss.
   3. The amount of skill and initiative required for the work.
   4. The degree of permanence of the working relationship.
   5. The worker’s investment in equipment or materials required for the task.
   6. The extent to which the service rendered is an integral part of the employer’s business.

For example, a painter hired by a widget manufacturing company to paint their building is most likely to be classified as a true independent contractor under these factors because:

• • The painter determines how the painting will be done and on what schedule.
  • The painter sets the price for the work, which is consistent with being in business for one’s own benefit.
  • The painter possesses the skills for the task and is not relying on the company for training.
  • The working relationship is short-lived, lasting only as long as the painting project.
  • The painter owns and supplies the equipment for the job.
  • The painting service has nothing to do with the company’s primary business of making widgets.

In contrast, a worker at the manufacturing plant, who has made widgets for the company for years under the direction and supervision of company management, would be considered an employee entitled to FLSA protections.

The new rule is consistent with the DOL’s current agenda to bring more workers under the umbrella of the FLSA and to aggressively crack down on what it considers illegal misclassification and wage theft by some employers. Employers should take the release of this final rule as an opportunity to reassess their workforce and ensure workers are properly classified.

Please contact Mark Fijman or any member of the Labor and Employment team if you have questions or need advice or guidance.