Final Rule Targets Worker Misclassification

On January 9th, 2024, the U.S. Department of Labor (DOL) announced a final rule for worker misclassification prevention. In summary, the rule will help employers and workers better understand employee classifications. This includes when a worker qualifies as an employee or an independent contractor under the Fair Labor Standards Act (FLSA). Previously, in July 2023, the DOL’s Wage and Hour Division (WHD) announced it was seeking claimants for a case settlement of over $5.6 million for illegal employee misclassification.

Worker Misclassification Prevention Under the FLSA

The FLSA is the country’s primary federal wage and hour law and one of the five employment laws all businesses must know. As such, the FLSA provides a minimum wage and overtime protections for virtually all U.S. workers. Generally, the FLSA requires private sector and government employers to pay a federal minimum wage of not less than $7.25 an hour and an overtime pay rate of one and one-half the regular pay rate during hours worked over 40 a week. However, some employers illegally and inaccurately classify their workers as independent contractors to avoid paying required overtime. What’s more, this illegal employee misclassification denies workers benefits and protections to which they are legally entitled. It’s worth noting that misclassifying employees is unlawful even if the employee agrees to the erroneous classification. Independent contractors differ from employees in that they:

• control their workload or run their own business,
• provide their materials,
• work with multiple clients, and
• deal with temporary client relationships.

Overview of the New Employee or Independent Contractor Classification Final Rule

Explicitly, in alignment with worker misclassification prevention, the final rule guides proper classification and combating employee misclassification. According to the DOL, misclassification causes multiple issues. Those problems include:

• impacting workers’ rights to minimum wage and overtime pay,
• creating the ability to facilitate wage theft,
• allowing employers to undercut their law-abiding competition, and
• hurting the economy at large.

In particular, the new “independent contractor” rule restores the multifactor analysis used by courts for decades. In short, the rule ensures that all relevant factors are analyzed to determine whether a worker is an employee or an independent contractor. These six factors are:

• any opportunity for profit or loss a worker might have;
• the degree of permanence of the work relationship;
• any financial stake and nature of any resources a worker has invested in the work;
• the degree of control an employer has over the person’s work;
• whether the work the person does is essential to the employer’s business; and
• a factor regarding the worker’s skill and initiative.

Separately, the new rule rescinds the 2021 Independent Contractor Rule, which the department believes is inconsistent with longstanding judicial precedent.

Employer Takeaways

In conclusion, while crafting the new rule, the WHD considered stakeholder feedback gathered at forums in 2022 and during the proposed rule’s comment period in October 2022. Indeed, now that the DOL has announced the final rule, employers should examine the job responsibilities of their current employees and future hires to determine proper worker classification by comparing them to the reestablished multifactor analysis. The rule aimed to enforce worker misclassification prevention takes effect on March 11th, 2024.