DOL Rule Changes: Employee Classification
For years, employers have struggled to properly classify employees versus independent contractors. A recent final rule issued by the Department of Labor (DOL) aims to help employers and workers better understand and analyze worker classification under the Federal Fair Labor Standards Act, or FLSA.
The Final Rule, scheduled to take effect March 11, 2024, is likely to result in the classification of more independent contractors as employees for FLSA purposes.1 Workers who are reclassified as employees may be entitled to minimum wage, overtime and other protections under the FLSA that are not required for independent contractors.
To determine if a worker is an employee or an independent contractor, employers must give full consideration to six factors.
- Opportunities for profit or loss
- Financial stakes and resources a worker has invested in the work
- Degree of permanence of the work relationship
- Degree of control the employer has over the person’s work
- Whether the work is essential to the employer’s business
- The worker’s skill and initiative2
Under the new rule, no factor is more or less important than any other factor, and a worker’s classification is based on the totality of the circumstances. The rule also allows additional factors to be considered if they are relevant to the overall question of the worker’s economic independence.
Why does this matter?
Big problems can occur when you improperly use independent contractor status despite the law viewing your worker as your actual employee can. These problems can include penalties, back taxes, employment-related complaints, claims and lawsuits. Each problem comes with an unique impact that can take a financial and administrative toll. So, it’s in your best interest to understand this guidance and make an accurate decision about worker status.
Who is a “benefits-eligible” employee?
Beyond potential wage and hour issues, misclassifying workers can wreak havoc on your employee benefits plan. True independent contractors — those who are properly classified as non-employees — are typically excluded from (or left on their own to acquire) the types of benefits employers usually make available to employees.
A worker who is improperly classified may have a cause of action against you for failure to provide legally required benefits, benefits-related notices, and other damages.
Can misclassifications mess up benefits plans?
The benefits plan itself can suffer, too. While the Internal Revenue Service (IRS) uses its own test to determine who is an employee for tax purposes, employees reclassified under the FLSA may also have to be reclassified for other benefits and tax purposes. And, without accurate information about who is and is not an employee, Affordable Care Act (ACA) forms and reporting will almost certainly be inaccurate.
Complications may arise as to how to treat reclassified employees under the employer’s written plan document, including how to handle claims for retroactive coverage. Premiums may be affected based on the claims experience of newly classified employees, and compliance requirements such as nondiscrimination testing results may change or have to be recreated.
What about paid Family and medical leave initiatives?
With paid family and medical leave (PFML) laws rolling out across the country, you as an employer need to know who must be provided with paid leave and other benefits. Such state programs have their own definitions of “employee,” which may or may not align with FLSA guidance.
Specifically, PFML programs often allow access to employees who don’t meet eligibility criteria for other forms of leave (e.g., minimum hours of service and employment duration), such as part-time, seasonal, and temporary employees. Improperly classifying employees as independent contractors in this context could result in an employer not making the required premium contributions for the PFML program, creating risk of fines and penalties.
What should employers do now?
Worker classification is one of the most complex areas of employment law. Employers should work closely with legal counsel to ensure workers are properly classified. Before auditing or examining your workforce, reach out to your attorney to help you understand the impacts of reclassifying workers.
Employers should also consider developing strong policies and procedures for engaging independent contractors, as well as other contract workers, to ensure worker classification guidelines are followed.
While it is difficult to pinpoint roles that may be most at risk for misclassification in the school business context, employers should pay attention to any individual providers designated as a consultants or contractors – particularly if they are issued a Form 1099 rather than a Form W-2 at tax time.
Though this type of arrangement may be legitimate, it is important to evaluate each potential employment relationship on its own facts and circumstances, and to work with your counsel to ensure proper worker classification.
This blog is up to date as of February 2024 and has not been updated for changes in the law, administration or current events.
