On January 10, 2024, the U.S. Department of Labor (DOL) issued new guidance for how employees and independent contractors are classified under the Fair Labor Standards Act (FLSA). This final rule went into effect on March 11, 2024.
As a business owner, it’s imperative that you understand this new DOL final rule regarding worker classification to ensure you don’t unnecessarily expose your company to various legal and tax liabilities for not complying with the rule. In addition to it being important to apprise yourself of this rule as a company that intends to continue operating above the law, doing so is also critical if you’re preparing to sell or raise capital for your business.
Below, we’ll summarize what the new rule says regarding employee and independent contractor classification and address how compliance impacts your business.
Understanding the Purpose of the DOL’s New Guidance
The new rule centers around employers applying an “economic reality test” when classifying those who work for them as either independent contractors or employees per FLSA. The latter is a federal law that was enacted in 1938 to ensure, among other protections, that workers receive the federal minimum wage or better plus overtime pay at 1.5 times their regular pay rate.
What the New Guidance Says About the Classification of Workers
When announcing the new ruling, the DOL outlined a 6-factor test to replace the 2-factor one previously utilized by employers trying to determine worker status per FLSA. The previously used 2-part test focused on “core factors,” which were “the nature and degree of the worker’s control over the work” and “the worker’s opportunity for profit or loss based on initiative, investment, or both.”
The new economic reality test provides that employers assess a worker’s classification on the following six factors, without “predetermined weight” on any single one:
- 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
- Skill and Initiative
As you can likely tell, there’s now more of a focus on whether you, as a company, and your potential workers are economically dependent or independent from one another. Dependence indicates your company may need to classify a worker as an employee instead of an independent contractor.
How the New Employment Classification Rule Effective March 11 Impacts Your North Carolina Business
Whether you own a business here in Raleigh or elsewhere, the next step is to take some time to review the classification of your contractors and employees as soon as possible. It’s important to do so to verify that they’re not improperly categorized under the new employee classification directive. Failing to do so could result in fines and other civil penalties you may be able to avoid.
In addition, if you are positioning your company for possible investors or purchasers, you do want to be confident in your employee classifications when embarking on the due diligence process.
The Future Impact of Federal Guidance Like This New Worker Classification Rule
Despite being a federal agency, the DOL does not have the authority to implement and enforce laws. However, past guidance like this that it has issued has been cited by workers, employers, advocacy groups, and attorneys when filing motions in court cases and in other matters.
It’s not uncommon for judges to be asked to consider rules like these when weighing arguments in employment-related cases.
New rules like these also have the potential to shape future laws that are legally binding.
Getting Answers to Operational Questions as a Business Owner
Here at Wilson Ratledge, we’ve long worked with businesses on operational matters to avoid or mitigate the consequences that come with uninformed decisions. We are here to explain this new DOL final rule more in-depth and to help you assess whether your workers are indeed classified correctly. Reach out to our law firm if you need assistance with this or any business matters.