A Basic Guide to the DOL’s 2024 Rule on the Classification of Independent Contractors
On March 11, 2024, the United States Department of Labor’s new rule on independent contractors goes into effect. Because the rule rescinds the more business friendly version from 2021, it makes it more difficult for employers to hire and maintain independent contractors and gig workers. This change is likely to create classification challenges from employees and increase the litigation of misclassification and unpaid overtime lawsuits.
Employers who misclassify workers can be liable for unpaid overtime going back three years, double damages, attorney fees and costs under the Fair Labor Standards Act (FLSA). Liability under the FLSA extends to both companies and individuals “acting directly or indirectly in the interest of an employer in relation to an employee.” This means some owners, officers and non-owner managers can be sued and held personally liable in addition to the company itself being liable.
While the new rule limits the use of independent contractors, it is generally consistent with earlier judicial precedent and the DOL’s earlier interpretative guidance. It applies the following six factors to analyze employee or independent contractor status under the FLSA:
- 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 includes details regarding the application of each of these six factors. No factor has a predetermined weight, and additional factors may be relevant if they assist in the determination of whether the worker is in business for themself, as opposed to being economically dependent on the employer for work.
Not surprisingly, two federal court challenges have been filed seeking to stop the implementation of this new rule. Meanwhile, employers should review their independent contractor agreements and classification policies in light of the new rule to be prepared for its implementation.
This publication is for general information only and intended for clients and friends of Donnelly + Gross. It should not be relied upon as legal advice as the law related to each situation varies. The sharing of this information does not establish a client relationship.