Classification as an Employee or Independent Contractor: What Every Employer Needs To Know

By: Michael P. Sawicki, Esq.

Effective March 11, 2024, the Department of Labor’s (DOL) new rules become effective to provide additional information to employers regarding the proper classification of workers as independent contractors or employees under the Fair Labor Standards Act (FLSA). These new rules will rescind the rules established on January 7, 2021, under the Trump Administration which focused on two core factors: (i) the nature and degree of the worker’s control over the work; and (ii) the worker’s opportunity for profit or loss based on their initiative or investment.

The new rules under the Biden Administration will broaden the analysis based on an “economic reality” test which focuses on the extent to which a worker is economically dependent on the employer. This test evaluates seven multiple factors equally to determine the nature of the working relationship alongside the core factors set forth above:

• The extent to which the services rendered are an integral part of the employer’s business;
• The permanency of the relationship between the worker and the business;
• The amount of the alleged contractor’s investment in facilities and equipment;
• The nature and degree of control by the business;
• The alleged contractor’s opportunities for profit and loss;
• The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; and
• The degree of independent business organization and operation.

Now, employers will be required to weigh all the relevant factors equally based on a totality of the circumstances to determine whether a worker is an independent contractor or an employee. The rule provides guidance on proper classification and seeks to combat employee misclassification that impacts a workers’ rights to minimum wage and overtime pay which can affect competition.

 In withdrawing the prior rule, the DOL relied on over 1,000 comments received from state officials, members of Congress, labor unions, social justice organizations, worker advocacy groups, and individual commenters. The good news for employers is that the same test the DOL has been using remains in effect, but now additional factors come into play providing guidance to employers in making the classification of employee versus independent contractor.

Once the new rules come into effect, the courts will provide additional interpretation of the application of the rules to specific fact patterns which are challenged by litigants as they try to apply the new rules. Employers should keep an eye on any developments in such litigation that may result in another change in the independent contractor analysis.

If you have any questions or would like to get more information regarding the classification of employees versus independent contractors, please contact Batoff Associates, P.A. at 410-864-6211.