Navigating New Federal Rules for Worker Classification
Small businesses often hire workers as independent contractors instead of employees, as independent contractors are generally not entitled to many rights and protections afforded to employees under the law. However, misclassifying a worker as an independent contractor can lead to significant financial consequences, including:
• Back pay (unpaid minimum wages and overtime)
• Value of employee benefits
• Unpaid taxes and contributions
• Penalties and interest
A savvy business owner must stay informed about changes in independent contractor laws to avoid these risks.
The New Department of Labor Rule
Effective March 11, 2024, the Department of Labor (DOL) has revised the criteria for determining whether a worker is an independent contractor under the Fair Labor Standards Act (FLSA). The FLSA sets standards for minimum wage, overtime pay, recordkeeping, and youth employment affecting employees in the private sector and public organizations.
The new six-factor test evaluates the following:
1. Opportunity for profit or loss depending on managerial skill
2. Investments by the worker and the potential employer
3. Degree of permanence of the work relationship
4. Nature and degree of control by the employer
5. Extent to which the work performed is integral to the employer’s business
6. The worker’s skill and initiative
Additional factors may also be considered, particularly if they demonstrate whether the worker is economically dependent on the employer for work.
Federal vs. State Laws
It’s important to note that the new federal rule does not override state-specific independent contractor tests, such as:
• California’s “ABC” Test
• New York’s Common Law Balancing Test
• Other state-specific laws and criteria
While overlaps exist, these distinctions mean that employers must remain aware of both federal and state-specific rules when classifying workers.
Key Takeaways for Business Owners
Business owners should:
• Consult with an attorney experienced in employment law in their state to verify worker classifications.
• Ensure written agreements accurately reflect the employer-worker relationship, aligning with the applicable classification factors.
• Monitor developments as courts interpret and weigh these new factors over time.
Conclusion
The DOL’s new six-factor test marks an important shift in how independent contractors are classified under federal law. As federal and state laws continue to evolve, businesses must stay proactive in understanding and complying with these changes. Misclassification can lead to costly penalties, but careful planning and legal guidance can help businesses avoid these risks.
At Cadet Legal, we’re closely monitoring these developments and are here to help you navigate the complexities of worker classification.
Disclaimer
The contents of this article should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Your viewing and/or use of the contents of this article do not create an attorney-client relationship with Cadet Legal. This article is for informational purposes only. Please consult with an attorney for advice tailored to your situation.
Sources
Department of Labor News Release
FLSA Misclassification Rulemaking
