New Employee Classification Rule

In January, the Department of Labor (DOL) Wage and Hour Division introduced a rule that changes the way workers are classified under the Fair Labor Standards Act (FLSA). This Final Rule, effective March 11, 2024, offers a more comprehensive test to determine a worker’s status, potentially making it more challenging to classify workers as independent contractors for FLSA purposes. The rule is limited to FLSA wage and hour requirements and does not impact rules related to retirement or health and welfare benefits, which are typically governed by ERISA and the Internal Revenue Code. However, this change could lead to confusion and possibly claims for benefits. Under the federal FLSA, employees are entitled to minimum wage, overtime pay and other benefits. Independent contractors are not entitled to such benefits, but generally have more flexibility.

The rule establishes a test examining six key factors:

• Opportunity for profit or loss
• Investments by the worker and employer
• Permanence of the work relationship
• Degree of control
• Extent to which work is integral to the employer’s business
• Worker’s skill and initiative

These factors guide the assessment but are not exhaustive and none carry greater weight. This broadened definition under the FLSA could lead to more independent contractors being classified as employees for FLSA purposes. The DOL has provided Fact Sheet 13 to assist in the proper classification of workers.

The reclassification of workers as employees under the FLSA could have significant implications, particularly regarding employee benefits. For retirement benefits, this could mean an increase in eligible retirement plan participants, affecting employer obligations under plans like 401(k). Changes in FLSA classification may also influence health benefits, potentially increasing employers’ obligations under the employer mandate rules. This highlights the importance of careful planning and potential adjustments to existing plans and policies. Moreover, the new rule might trigger additional reporting requirements for employers, especially if they surpass certain thresholds.

Employer Considerations

Employers and HR professionals should understand and adapt to these changes, particularly in the gig economy, where many workers are currently classified as independent contractors. The rule’s emphasis on a totality-of-the-circumstances analysis for worker classification requires careful consideration of various economic factors. Given the potential for ongoing regulatory developments and challenges to the rule, it’s essential for employers to stay informed and prepare for possible impact on their operations and worker classifications.