The U.S. Department of Labor (DOL) has provided final guidance on employee vs. independent contractor classification under the Fair Labor Standards Act (FLSA). On Jan. 9, the DOL Independent Contractor Rule was published.
The final rule takes effect March 11 and rescinds the 2021 rule developed under the Trump administration.
Employee vs. independent contractor classification under FLSA is to be determined by applying a six-factor “economic reality test”. These are:
Detailed guidance and examples of how to apply each factor under the final rule are provided by the DOL. These six factors are not exhaustive, and no single factor is determinative.
Misclassification of employees can have potentially serious consequences for employers. Under the FLSA, misclassified workers may be entitled to unpaid wages, including overtime, liquidated damages, unpaid payroll taxes and other contributions. In addition, employers could be liable for attorneys’ fees and costs.
Further, employers can be liable for up to two years, or up to three if the misclassification is considered willful. FLSA legislation also allows for individual liability for managers responsible for worker compensation or classification decisions.
The stakes are high.
According to the DOL, the new rule is intended to “reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.”
Misclassified workers are often denied basic workplace protections, including their right to minimum wage and paid overtime. FLSA guarantees a minimum wage for all hours worked as well as overtime pay for hours worked over 40 per week for all covered employees. Individuals who are classified as independent contractors, rather than “employees” are not entitled to these protections.
Research from the Economic Policy Institute highlights the extent of the issues:
Misclassification of employees also means a company’s claims of achieving pay equity, or stated gender pay gap may be inaccurate.
In addition to DOL regulation and FLSA requirements, employers must consider state laws on worker classification. Multiple states use the ABC test to evaluate worker status.
Generally, the test comprises three separate criteria an individual must meet to be classified as an independent contractor. Workers must:
Employers should act swiftly to review their employee vs. independent contractor classification processes. Leveraging the benefits of pay equity software like Trusaic PayParity can help to ensure compliance with DOL rules and promote fair pay practices.
Action items for employers include:
An intersectional pay equity audit is the only way of gaining an accurate insight into pay disparities. Intersectionality recognizes that individuals can experience discrimination and inequality based on the intersection of multiple identities, such as race, gender, disabilities, and age.
It is not a straightforward route for the Department of Labor regulation. At least two lawsuits have been filed to block the final rule. But the new rule is poised to take effect in the coming weeks.
Watch this space.
Stay compliant with DOL rules and evolving pay transparency legislation. Speak to one of our pay equity experts.
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