Misclassifying a worker can have big implications for a business owner when it comes to the Fair Labor Standards Act (FLSA). At times lines can be blurred and supervisors may be left confused about what work independent contractors should and shouldn’t be responsible for.
The Department of Labor has reversed a 2021 rule classifying employees and independent contractors, thus returning to an analysis previously used. This reset is now effective as of March 11, 2024.
John Barrett, attorney at Koley Jessen, said DOL’s economic realities test now provides a “totality of the circumstances” method of analysis, which classifies workers under the FLSA.
“The DOL’s main goal is to determine whether workers are economically dependent on the hiring party and, if so, classifies them as employees,” Barrett said.
The six factors considered by the DOL for classification under FLSA are:
- Opportunity for profit or loss depending
on managerial skill - Investments by the worker and the employer
- Permanence of the work relationship
- Nature and degree of control
- Whether the work performed is integral to
the employer’s business - Skill and initiative
Under the 2021 rule, more weight was given to two factors: the nature and degree of the worker’s control over their work, and the opportunity for profit or loss, Barrett said.
Now each of the factors is weighed evenly, as they did prior to 2021.
“The DOL will also consider the financial stake and worker’s resources invested in the work,” he said. “This additional factor was previously incorporated into the DOL’s opportunity for profit or loss analysis under the 2021 rule.
“The final rule also revises the ‘integrated unit of production’ language from the 2021 rule, which limited the inquiry into whether the work performed was part of an established unit of the organization’s business. The DOL’s clarification broadens the integration analysis, which now looks at whether work performed is an integral part of the organization’s overall business.”
Determining Classification
Bottom line, the classification is meant to determine whether a worker is dependent on the employer or is in business for themself. Barrett said the framework for determining this classification is intentionally broad.
“Not all factors may be relevant to a given arrangement, and no factors should be considered in isolation,” he said.
Independent contractor arrangements typically involve workers investing in their own equipment, setting their own schedules, marketing their services, providing services to multiple businesses, and working on project-based assignments.
