February 5th, 2024

For Purposes of FLSA Many Workers Currently Treated as Independent Contractors May Need to be Reclassified

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Author: Darla J. McClure

The U.S. Department of Labor (DOL) recently implemented a significant change in the classification of employees and independent contractors under the Fair Labor Standards Act (FLSA), which is a federal law that applies to most businesses. On January 10, 2024, the DOL introduced a final rule set to take effect on March 11, 2024, replacing the 2021 Independent Contractor Status Rule. This transformative rule incorporates a multifactor analysis, examining crucial elements such as the worker’s opportunity for profit or loss, investments made by both the worker and the potential employer, the permanence of the work relationship, the degree of control over work, the integral nature of the work to the employer’s business, and the worker’s specialized skills and initiative. Here’s what you need to know as an employer:

Do I have to consider state laws in addition to the FLSA changes?

Yes, adhering to the federal FLSA alone does not guarantee full compliance. Employers must additionally observe relevant state laws on worker classification. Maryland is one of multiple states that use a far stricter test, known as the “ABC test,” which strongly leans towards categorizing workers as employees.

How can I be sure I am properly classifying my workers?

Various state and federal agencies employ distinct criteria to determine whether a worker should be classified as an employee or an independent contractor, depending on the specific context. States like Maryland, New Jersey, California, Illinois, Ohio, and Oregon have their own versions of the ABC test. In the context of the Workplace Fraud Act and Maryland’s Unemployment Insurance law, the state has adopted the commonly known “ABC Test.”

According to the ABC Test, a worker is presumed to be an employee unless:

  1. The individual operates free from direction and control;
  2. The individual is customarily engaged in an independent business of the same nature as the work involved; and
  3. The work is conducted outside the usual course of business of the person for whom it is performed, OR the work is carried out outside any place of business of the person for whom it is performed.

And remember, an employee can not waive any rights to be classified as an employee even if they sign a contract that states that they agree to be an independent contractor.

What happens if I misclassify a worker?

Misclassification can lead to severe penalties, including back pay, damages, and legal repercussions.

What should my next steps be?

Next steps should involve a thorough review, with the assistance of a Stein Sperling employment law attorney, of worker classifications to ensure compliance with the recently implemented DOL rules, as well as the “ABC Test” under state law. Employers should assess each worker based on the outlined criteria, including factors such as freedom from control, engagement in independent business, and the nature of the work’s integration with the employer’s business.