The U.S. Department of Labor (DOL) recently announced a final rule to help employers properly classify workers as either independent contractors or employees under the Fair Labor Standards Act (FLSA).

The rule, which went into effect on March 11, 2024, addresses six factors that guide the analysis of a worker’s relationship with an employer. The multifactor analysis includes the following:

• Any opportunity for profit or loss a worker might have;
• The financial stake and nature of any resources a worker has invested in the work;
• The degree of permanence of the work relationship;
• The degree of control an employer has over the person’s work;
• Whether the work the person does is essential to the employer’s business; and
• The skill and initiative of the worker.

The rule rescinds the 2021 Independent Contractor Rule because the DOL believes it is not consistent with the law and longstanding judicial precedent. The rule restores the totality-of-the-circumstances analysis to determine if a worker is an employer or independent contractor under the FLSA.

What is an independent contractor?

Independent contractors often enjoy the freedoms tied to their employment classification, which may include little or no time in an office, more control of their work, and even job security.

Employers may hire independent contractors instead of full-time employees for multiple reasons, but the biggest may be the cost savings. Typically, employers are not responsible for an independent contractor’s traditional employee benefits, payroll taxes, unemployment and worker’s compensation insurance, and more.

Why it is important to properly classify workers

But while a worker’s independent contractor status offers some benefits to both the worker and the business, employers are still responsible for getting their employee classifications correct. Business owners who misclassify their workers face consequences including government audits, lawsuits, and more.

Misclassifying workers as independent contractors adversely affects employees because the employer’s share of taxes is not paid and the employee’s share is not withheld. Business owners could be held liable for employment taxes for misclassified workers.

Help is available

The business attorneys at O’Reilly Rancilio are available to help employers review their policies. To speak with an attorney, please call 586-726-1000 or visit our website.