On January 9, 2024, the Department of Labor (DOL) announced a six-factor test for determining whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). This new rule takes effect on March 11, 2024. Companies should review current (and future) independent contractors to ensure compliance with the new framework.
Why is this important?
Being classified as an employee carries with it protections under the FLSA. The FLSA establishes certain wage and hour rights for employees. It prevents employers from misclassifying workers as independent contractors and therefore denying them the right to minimum wage, overtime pay, and other protections. The same protections do not apply to independent contractors. Moreover, misclassified independent contractors can expose employers to significant potential liability.
What has changed?
The 2024 rule, which is more favorable to employees, adopts a six-factor test to determine whether a worker qualifies as an independent contractor. The six factors are:
- opportunity for profit or loss depending on managerial skill;
- investments by the worker and the potential employer;
- degree of permanence of the work relationship;
- nature and degree of control;
- extent to which the work performed is an integral part of the potential employer’s business; and
- skill and initiative.
The rule states that no single factor is assigned a predetermined weight. It also allows for consideration of other factors outside of the six-factor test if relevant to determining a worker’s economic dependence on the employer, Thus, it is likely that where the worker is dependent on the employer for work, they will not qualify as an independent contractor under this rule.
As employers review the new rule, they should consider existing and future independent contractor arrangements and how those fit within the new framework, as well as existing applicable state and local frameworks.
Companies that are heavily reliant on independent contractors or that have a growing number of independent contractors should consider conducting a worker classification audit using the framework provided in this new six-factor test. When reviewing and analyzing their independent contractor relationships, employers should remember that the law presumes every worker is an employee and the employer has the burden of overcoming that presumption for lawful classification of a worker as an independent contractor.
Note for Sequoia Clients: It is important to note that Sequoia does not provide legal advice and clients are responsible for properly classifying their workers. Clients should consult counsel if they want legal advice on how to ensure compliance with the new framework.
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