Misclassification can be expensive for your business.
In today’s economy, where many workers desire flexibility through what is commonly called “gig work,” it is critical for employers to know whether a given worker may be classified as an independent contractor, or whether that worker is more appropriately classified as an employee. It is essential for employers to understand the rules under the Fair Labor Standards Act (“FLSA”), and the enforcement power of the U.S. Department of Labor Wage and Hour Division (“USDOL”).1
Effective March 11, 2024, USDOL introduced changes to the classification rules under the FLSA, found at 29 C.F.R. Part 795. Why does this matter to employers? Primarily because misclassification of an employee as an independent contractor may mean that the misclassified “employee” did not receive overtime compensation, required under the FLSA for working more than 40 hours per week. USDOL can order an employer to pay unpaid overtime compensation going back two years. USDOL can also assess “liquidated damages,” which has the effect of doubling any overtime compensation owed to misclassified workers. Current USDOL policy regarding liquidated damages gives regional officer considerable flexibility in deciding to assess liquidated damages, increasing the financial risk to employers.
The minimum wage, overtime pay, and accompanying recordkeeping obligations under the FLSA apply only to employees, not independent contractors. As a general concept, USDOL focuses on the “economic realities of the worker’s relationship with the employer” when determining whether a worker is an independent contractor or more properly classified as an employee. Specifically, USDOL considers at least six factors, not one of which is determinative on its own:
1. A worker’s opportunity for profit or loss depending on managerial skill.
2. Investments by the worker and the employer.
3. The degree of permanence of the work relationship.
4. Nature and degree of control over work.
5. Extent to which the work in question is an integral part of the potential employer’s business.
6. Skill and initiative the worker uses to perform the work.
For example: Can the worker negotiate pay? Or turn down work? Where is the work performed? What tools are used to accomplish the work? Do both the worker and the employer expect the work to continue indefinitely? How is the work supervised? Is the work integral to what the business does, or is the work peripheral to the mission of the business? What specialized skills are required to perform the work?
Each of these factors, all of which represent a spectrum of possibilities, must be analyzed both individually and as a whole. The analysis is complex, and it is important for the financial health of your business to consult with an attorney on classification issues. In fact, in the event of a misclassification enforcement proceeding, the USDOL and courts will consider whether the employer acted in “good faith,” including whether the employer took the classification decision seriously and consulted with legal counsel.
Do you have questions about how the Fair Labor Standards Act applies to your business? Reach out to L4SB today for answers.
1 Classification questions are relevant in other areas, notably taxation, with the U.S. Internal Revenue Service having its own rules and enforcement authority. This article is focused on the requirements under the Fair Labor Standards Act.
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