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U.S. Department of Labor issues final rule on independent contractor classifications


January 17, 2024

Employers need to be aware of a change in determining who is an employee vs. independent contractor effective March 11.

During Republican administrations, we tend to see regulations favoring employers. During Democratic administrations, regulations tend to shift toward favoring employees and labor organizations. At times, this results in regulations changing back and forth. This is apparent with the most recent final rule change just announced.

How we got here

During the Obama administration, courts and the Department of Labor (DOL) consistently applied an economic reality test to determine whether a worker was an independent contractor, as opposed to an employee.

That test had six components to determine if the contractor has:
  1. Opportunity for profit or loss depending on managerial skill.
  2. Investments by the Contractor and the potential employer.
  3. The degree of permanence of the work relationship.
  4. Nature and degree of control over the work performed.
  5. The extent to which the work performed is an integral part of the potential employer's business.
  6. The skill and initiative.
Based on these six elements, the courts and the DOL did not weigh any of the six components more heavily than any of the others. 

However, under the Trump administration, the DOL shifted the analysis to the more employer-friendly side of the spectrum.

The Trump Rule limited the economic reality test to five components (combining two of the above components into one), greatly narrowed one component and gave much greater weight to two of the five components.

If those two “core” components — the nature and degree of control over the work being performed and the worker’s opportunity for profit or loss — was weighed in favor of the finding of independent contractor status, the Trump Rule provided that there was a “substantial likelihood” that the worker was an independent contractor. In such a situation, the other three components carried little, if any, weight in the analysis.

What has changed?

On Jan. 10, 2024, the DOL published its Final Rule significantly changing the existing standard for the independent contractor classification under the Fair Labor Standards Act (FLSA). This Final Rule rescinds changes made in the final days of the Trump administration and reverts back to an earlier and more “worker-friendly” rule under the Obama administration determining who is considered to be an employee vs. an independent contractor. 

Independent contractors are not considered employees, are not eligible for employer provided benefits including workers compensation, unemployment insurance, social security and Medicare contributions, tax withholding, etc.

Misclassification by employers may result in significant fines, tax payments and other penalties.

Employers should review any persons considered to be an independent contractor to ensure their compliance under the six components of the “economic realities test” (with each component weighted equally) prior to March 11, 2024. 

Potential additional changes

On Sept. 8, 2023, the DOL proposed to make another significant change to the FLSA.  This has not yet been implemented.

Currently, to be classified as exempt, employees must pass three tests. They must:
  1. Be paid on weekly basis, regardless of hours worked or quality/quantity of work produced.
  2. Be paid a minimum of $684 per week.
  3. Meet the “primary duties test” in which the employee falls into one or more of exempt classifications. 
The change would increase the salary test to increase the current minimum of $684/week ($35,568 annualized) minimum payment to $1,059 a week ($55,068 annualized). 

Continue to monitor this potential significant change. More information on employees classified under exempt status may be found at on the DOL website. Have additional questions on the FLSA? The members-only HR Hotline has answers!

Larry Morgan, MA, SPHR, SHRM-SCP, GPHR, is the President of Orion HR Group and frequent MNCPA instructor and author. He is also the expert behind the MNCPA HR Hotline. Morgan brings more than 40 years of HR experience to the MNCPA in areas that include retail, high-tech, manufacturing and financial services.