Headquarters of Department of Labor

The DOL Issues Final Rule Creating New Standard for Classifying Workers as Employees vs. Independent Contractors

On January 9, 2024, the United States Department of Labor (DOL) released its final rule on worker classification under the Fair Labor Standards Act (FLSA). This new rule, effective as of March 11, 2024, signals a return to a standard more likely to classify workers as employees than contractors. Thus, it is more likely that employers will be determined to have misclassified workers as contractors, resulting in liability.

The New Rule: A Deviation From Trump-Era Classification Standards

The final rule, which is consistent with the proposed rule released by the DOL in October 2022, differs significantly from the Trump Administration’s “core factors” test. The Trump-era rule emphasized two primary factors: the nature and degree of control over the work, and the worker’s opportunity for profit or loss. Three other factors—the skill required, the permanence of the relationship, and whether the work is part of an integrated unit of production—were deemed less significant.

The new rule requires a more detailed and comprehensive analysis by establishing the totality-of-the-circumstances economic reality test, a six-factor test giving equal weight to each factor in determining whether a worker is an employee or an independent contractor. The DOL claims that this approach is consistent with how federal courts have evaluated employee vs. independent contractor classification for decades.

The factors outlined in the final rule include:

    1. the worker’s opportunity to share profit or loss,
    2. the investments by the worker and potential employer respectively,
    3. the permanence of the work relationship,
    4. the worker’s or employer’s degree of control over the work,
    5. the integration of the work into the employer’s business, and
    6. the skill and initiative required of the worker.

The final rule also addresses how factors such as scheduling, remote work, and the ability to work for others should be considered under factor four—the control factor—and also provides additional context to other factors as well.

Why This Matters to Michigan Employers

All Michigan employers, as well as employers across the country, who are covered under the FLSA will be impacted by the final rule. Generally speaking, the FLSA applies to employers who have at least two employees and gross $500,000 or more a year. If a worker is classified as an employee as opposed to an independent contractor, then that worker is covered under the FLSA, which sets federal rules for minimum wages and overtime. When the FLSA applies, employers are also required to maintain certain records.An employer who violates the FLSA can be subject to lawsuits, be forced to pay back pay for unpaid overtime, and face fines, among other consequences.

It’s also important for Michigan employers to keep in mind that Michigan has its own standards for independent contractor classification, and the more stringent of the two standards is likely to apply. Currently there is legislation pending in the Michigan legislature that would tighten the definition of “independent contractor” considerably. Under the new bill, an independent contractor is “an individual who performs work” and to whom the following three conditions apply:

    • The individual is free from control and direction of the payer in connection with the performance of the work, both under a contract and in fact.
    • The individual performs work that is outside the usual course of the payer’s business.
    • The individual is engaged in an independently established trade, occupation, or business of the same work performed by the individual for the payer.

The bottom line is that, under federal and state laws, classifying a worker as an employee or independent contractor requires a complex analysis of various factors. And the risks and consequences of misclassifying can be severe.

Businesses and employers should remain diligent in analyzing their workers’ classifications and consult an experienced attorney with any questions. The attorneys at Fraser Trebilcock Davis & Dunlap, PC will continue to monitor these developments and stand ready to guide clients in their compliance with the new regulations set to take effect.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

Attorney David J. HoustonFraser Trebilcock Shareholder Dave Houston has over 40 years of experience representing employers in planning, counseling, and litigating virtually all employment claims and disputes including labor relations (NLRB and MERC), wage and overtime, and employment discrimination, and negotiation of union contracts. He has authored numerous publications regarding employment issues. You can reach him at 517.377.0855 or dhouston@fraserlawfirm.com.