The Fair Labor Standards Act (FLSA), New York Labor Law (NYLL) and many other laws applicable in New York and in other states provide protections for employees but not for independent contractors. Thus, whether the law classifies a worker as an employee, or an independent contractor implicates a host of rights for that person and obligations on the part of the employer. The United States Department of Labor (DOL) has recently announced a rule for worker classification which will take effect March 11, 2024.
The final rule adheres to the traditional “totality-of-the-circumstances” test to determine whether the economic reality of the whole activity reflects an employment or an independent contractor relationship. As a new factor in the analysis, the final rule considers “whether the work performed is an integral part of a potential employer’s business rather than part of an integrated unit of production” and “also provides broader discussion of how scheduling, remote supervision, price setting, and the ability to work for others” should be considered under the control factor. Thus, under the final rule, the “economic reality” of the relationship is determined by the following six factors:
- 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
- Skill and initiative (with specialized skill tending to show an independent contractor relationship, within the context of the totality of the circumstances).
The final rule replaces the DOL’s proposed 2021 independent contractor rule (the “2021 IC Rule”). The 2021 IC Rule upended the traditional totality-of-the-circumstances approach that courts and the DOL had applied since the 1940s. Instead, the 2021 IC Rule had designated “the nature and degree of control over the work and the worker’s opportunity for profit or loss” as “core factors” entitled to greater weight in the worker classification analysis, with the other traditional factors relegated to “non-core factors.” The final rule replaces the 2021 IC Rule, which had a complicated history with respect to implementation, with the updated totality-of-the-circumstances approach summarized above.
Implications for Employers
Worker misclassification has long been a proverbial land mine for employers, with an overlay of federal, state and local standards, and with entire industries where non-compliance is relatively common. The DOL’s final rule provides employers with a fresh opportunity to revisit their worker classifications to make sure that they comply not just with the FLSA, but with all applicable law.
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