employment

Are Your Workers Independent Contractors or Employees: A New DOL Rule Aims to Help Employers Answer That Question

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Author Saman Haque

The U.S. Department of Labor’s (DOL) Wage and Hour Division updated its regulation concerning Employee or Independent Contractor Classification Under the Fair Labor Standard Act, with changes effective March 11, 2024. The revised rule finalizes the proposed rulemaking released in October 2022 with a goal ostensibly to remove confusion over whether a worker falls into the” employee” or “independent contractor” classification for wage and hour purposes. According to the DOL, the updated analysis for classifying “employee” and “independent contractor” seeks to be more consistent with judicial precedent and the Fair Labor Standard Act’s text and purpose.

The terms “worker,” “employee,” and “independent contractor” are often misinterpreted and inappropriately used interchangeably. Because classification as an “employee” provides certain protections, including minimum wage and overtime pay requirements, it is essential that employers make the correct classification. To help prevent misclassification, the DOL has created a resource page, including a helpful infographic, here: Misclassification of Employees as Independent Contractors Under the Fair Labor Standards Act | U.S. Department of Labor (dol.gov) 

What Is the New Rule the Department of Labor Is Adopting?

As of March 2024, the DOL has adopted the economic reality test to determine a worker’s correct classification for purposes of federal wage and hour laws. This test considers the following factors to assess whether a worker is economically dependent on the employer, or if, instead, they are in business for themselves:

  1. Opportunity for profit or loss depending on managerial skill
  2. Investments by the worker and the employer
  3. Degree of permanence of the work relationship
  4. Nature and degree of control
  5. Extent to which the work performed is an integral part of the employer’s business
  6. Skill and initiative

The updated rule does not use a “core factors” approach to the economic reality test; instead, it looks at the totality of the circumstances. No single factor is determinative, and each is considered in connection with the economic reality of the worker’s entire activity. Factors do not have a predetermined weight.

When determining whether a worker is an employee or independent contractor, the assessment’s focus is “the economic dependence” of the worker. In other words, as stated in the final rule, the “statutory language thus frames the central question that the economic reality test asks—whether the worker is economically dependent on an employer who suffers or permits the work or whether the worker is in business for themself.”

In its final rule, the DOL clarified that economic dependence focuses on whether the worker is in business for themselves and does not focus on the amount of money the worker earns or whether they have other sources of income.

How Does the New Rule Differ from the 2021 Independent Contractor Rule?

This new rule replaces and updates the guidance in the 2021 Independent Contactor Rule. In seeking to align with judicial precedent, the updated rule makes the following key changes:

  • Returns to a totality-of-the-circumstances economic reality test, with no single factor or group of factors having predetermined weight;
  • Looks to six factors (instead of five), including any investments made by the worker and the potential employer;
  • Provides an additional analysis of the control factor, with a detailed discussion of how scheduling, supervision, pricing, and the ability to work for others should be considered;
  • Returns to the DOL’s consideration of whether the work is integral to the employer’s business versus the work being exclusively part of an “integrated unit of production”;
  • Provides additional context to some factors; and
  • Removes a provision from the 2021 Independent Contractor Rule that had minimized the relevance of an employer’s reserved but unexercised rights to control a worker.

Legal Challenges and What Employers Should Do Now?

Unsurprisingly, after the DOL announced that the New Rule would go into effect March 11, 2024, the DOL was met with legal action challenging the new rule. Large organizations, small businesses, and even individuals have challenged the new rule, claiming it lacks predictability and negatively impacts several industries. It appears that for many, this new rule is not as clear cut as the DOL hoped and makes it more difficult to categorize workers as independent contractors. We will watch closely as the DOL responds to the nationwide claims challenging the new rule and how it will affect implementation.

Employers should review their census of employees and independent contractors in light of the updated analysis and ensure individuals are classified appropriately for purposes of wage and hour requirements, paying special attention to individuals classified as independent contractors. Employers also should keep in mind that workers classified as independent contractors must pass the test explained above under federal law as well as any tests that may be required by state laws.   

If you have questions about the proposed rule, independent contractor classification, or other labor and employment matter, do not hesitate to reach out to the Employment & Executive Compensation Group at Levenfeld Pearlstein.

For additional information on the updated rule, please see the DOL’s resource with FAQs: Frequently Asked Questions – Final Rule: Employee or Independent Contractor Classification Under the FLSA | U.S. Department of Labor (dol.gov)

2019 Labor and Employment Law Checklist

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Each year, LP’s Labor & Employment Practice Group is pleased to provide a short checklist of steps that all companies should consider taking to measure their readiness for the coming year. We hope that you find our 2019 Labor and Employment Law Checklist to be a helpful guide to best practices for the year ahead.

Download a fillable PDF here. Print it out for yearlong reference, or get started right away and enjoy the satisfaction of checking some very important items off your list.

 

  • Keep Ahead of Harassment & Discrimination Claims.  The #MeToo and #TIMESUP headlines did not slow down in 2018, and preliminary data released by the EEOC showed more than a 50% increase in EEOC charges claiming sexual harassment. In addition, Illinois and New York implemented new requirements relating to harassment policies and training, with Illinois requiring policies for employers that do business with the state or claim EDGE tax credits, and New York implementing strict requirements that apply to all companies with New York employees.  The EEOC also issued “Promising Practices for Preventing Harassment” to provide strategies to employers to reduce workplace harassment. Committed and engaged leadership, strong and comprehensive harassment policies, and regular, interactive training tailored to the audience and the organization are the new standard. If you have not conducted training and updated your harassment, discrimination and retaliation policies to meet these standards, put it on the agenda for early 2019.  

 

  • Update Policies to Reflect New Reimbursement Requirements. Under a new law targeting employers who require employees to use their personal cell phones for business purposes, Illinois now requires employers to reimburse employees for expenses they incur that are “directly related” to the services they are providing their employer. However, employers can set requirements around how and when requests for reimbursement must be made.  It is critical that employers confirm that expense reimbursement policies provide the framework for requesting reimbursement, and that policy manuals are clear that employees are eligible for reimbursement for these expenses, at least to the extent they exceed what the employee would have spent for personal reasons. 

 

  • Review Compensation Policies. The gender pay gap continues to draw the attention of lawmakers. For example, California, Connecticut, Delaware, Hawaii, New York, New Jersey, Maryland, Massachusetts, Oregon, Puerto Rico, Vermont and a number of municipalities have adopted laws making it easier to prove discrimination and/or limiting the compensation information that can be requested from applicants.  And with the change in leadership in Springfield, Illinois might just follow suit in 2019.  Consider reviewing compensation policies to put the emphasis on the value of the work being performed, rather than on what the applicant was paid in his or her last position.   

 

  • Confirm Parental Leave Policies Don’t Discriminate.  Being more generous with paid leave to new mothers than new fathers can create significant liability if the difference is based on gender and not on the physical act of giving birth or the employee’s designation as a primary care giver.  In February 2018, Estee Lauder paid $1 million to more than 200 male workers to settle a charge claiming that the company’s parental leave policy discriminated against male employees. Employers should revisit maternity and parental leave policies to make sure that any difference between the leave being provided to male and female employees is based on a permissible reason.   

 

  • Comply with New Military Leave Protections.  A new Illinois Law –ISERRA– provides some additional protections beyond those of the Federal USERRA.  ISERRA applies to all Illinois employers, regardless of size and requires that a specific notice of rights be posted.  Make sure that your team is aware of these new requirements and that the notice is posted in your workplace. Also, if you have a military leave policy, confirm that it reflects ISERRA.  

 

  • Are Arbitration Agreements Right for You? After years of uncertainty, the Supreme Court determined that employers can legally require employees to arbitrate any disputes individually. But are these types of agreements right for your company?  There are pros and cons of arbitration, so talk with your legal advisors to determine whether the agreements that require individual arbitration make sense for your organization.   

 

  • Revisit Workplace Rules Following NLRB Shift. The NLRB, now controlled by Republicans, is undoing many of the standards put in place by the prior NLRB.  Many, but not all, of these rules are considered pro-employer, including a more practical approach to determining when handbook policies regarding confidentiality interfere with employees’ right to engage in concerted activity. This means that some of the disclaimers and limitations in employee handbooks that were put into place in response to the “old” NLRB’s standards are no longer necessary.  Consider revisiting employee handbooks to clarify policies to be consistent with the current rules. 

 

  • Consider Unpaid Intern Standard Changes.  For years we have counseled clients not to use unpaid interns or risk a variety of employment claims.  However, changes to legal standards from both the courts and the Department of Labor have provided a more practical approach and raises the possibility of treating interns as unpaid.  At the heart of the analysis is whether the internship is more for the intern’s benefit or the company’s, and whether the internship is an extension of their education.  If you have an internship program that works with students, or are considering one, talk to your legal counsel about whether the internships can be unpaid. 

 

  • Update Restrictive Covenants. There has been lots of conversation regarding restrictive covenants. In fact, states are increasingly passing laws related to non-competes. Most recently, Massachusetts passed the most sweeping legislation we have seen in several years, limiting when and how employers can prohibit competition and even requiring additional consideration during the time period in which the employee cannot compete. If your restrictive covenants are more than a few years old, or if they are not specifically crafted to meet the legitimate business needs of the company, it is important to revisit and update them to maximize enforceability.

 

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