Time to Evaluate Worker Classifications

On March 11, 2024, the DOL will be returning to its pre-2021 framework for evaluating whether workers should be classified as independent contractors or employees. This distinction determines whether a worker may be entitled to overtime under the Fair Labor Standards Act for hours worked over 40 hours in any workweek. Many employers have found themselves having to pay back wages to workers that were misclassified as contractors. A contract stating that the worker is serving as a contractor is not dispositive. If a worker’s classification is ever challenged, the DOL will not rely on what the parties assert is the classification, but instead what the actual relationship is between the parties. The rule implementing this return to the pre-2021 test to be applied in classification cases is said to reaffirm that workers are not independent contractors if they are, as a matter of economic reality, dependent on a business for work.

So, if you are unfamiliar with the economic reality test that was applied prior to 2021, you should consider the following six factors when determining if a worker is an independent contractor:

• Opportunity for profit or loss depending on managerial skill
• Investments by the work and the business
• Degree of permanence of the work relationship
• Nature and degree of control the business has over the work relationship
• Extent to which the work performed is an integral part of the potential employer’s business
• Skill and initiative

 This is not an ABC checklist of elements to be satisfied. Instead, as explained by the DOL in its fact sheet Frequently Asked Questions – Final Rule: Employee or Independent Contractor Classification Under the FLSA | U.S. Department of Labor (dol.gov), “No factor or set of factors among this list of six has a predetermined weight, and additional factors may be relevant if such factors in some way indicate whether the worker is in business for themselves . . .as opposed to being economically dependent on the employer for work. . . .”

Although this approach is more consistent with how federal courts have been evaluating the classification issue, the application of these factors is subject to interpretation and can lead to litigation. Therefore, the best place to start when evaluating whether a worker is properly classified is with the premise that the default relationship between a worker and employer is that the worker is an employee. (This is how government agencies generally approach the issue, and you will be asked to provide facts to support the assertion that the individual is a contractor.)

The IRS, the Florida Division of Economic Opportunity, Division of Worker’s Compensation, and the EEOC each have their own, albeit similar, frameworks for determining the proper classification for purposes of the laws that those agencies enforce. Further, under Florida Statute § 409.2576, businesses that pay or will pay an independent contractor over $600 in a calendar year must file a report within 20 days after their first payment to the contractor. For more information on requirements see New Requirements for Florida Businesses Using Independent Contractors – Williams Parker Attorneys at Law

Although the change in the standard is fast approaching, there is still time for businesses to consider whether their contractors are properly classified.