In early January, the U.S. Department of Labor (DOL) issued a final rule that will implement a tougher analysis for worker classification under the Fair Labor Standards Act (FLSA). This final rule will be effective on March 11, 2024. It is expected that this rule will cause more workers to be classified as employees rather than independent contractors, which will therefore provide more individuals with FLSA rights and protections.
Importance of worker classification
Independent contracts do not typically receive the same benefits and protection as employees. Similarly, employers are not required to withhold or pay taxes on payments to independent contractors. The misclassification of an employee as an independent contractor can result in unpaid overtime pay, back taxes, interest and penalties, unpaid benefits, and additional legal damages.
The final rule analyses employee or independent contractor status with six economic reality factors which include:
- The opportunity for profit or loss (depending on managerial skill);
- Investments by the worker and the potential employer;
- The degree of permanence of the work relationship;
- The nature and degree of control;
- The extent to which the work performed is an integral part of the potential employer’s business; and
- The worker’s skill and initiative.
These factors are used to assess whether a worker is economically dependent on a potential employer for work under the totality of circumstances. Please note that only the worker classification analysis is revised under the FLSA.
Employers should be aware that this change could impact employee benefits and Affordable Care Act (ACA) obligations. Depending on the plan’s term and the employee’s position, newly classified employees may be eligible to participate in the employee benefit plan/
Notably, smaller employers may be subjected to other compliance requirements by reclassifying workers. These compliance requirements include the ACA’s “pay or play” rules for applicable large employees, COBRA continuation coverage, job-protected leave under the FMLA, Form 5500 reporting, and Medicare Secondary Payer Rules.