The expanded “economic realities” test increases the government’s presumption that a worker is an employee entitled to overtime and minimum wage protection.
By Mickell Summerhays
On January 10, the U.S. Department of Labor (DOL) published a long-awaited rule changing its approach to determining whether a worker is an independent contractor or an employee under the Fair Labor Standards Act (FLSA). The new rule goes into effect March 11, 2024, and replaces a more employer-friendly standard enacted in 2021.
The new rule expands, from three factors to six, the government’s “economic realities” test, which seeks to determine whether independent contractors are truly in business for themselves or are actually employees who should be afforded full wage-and-hour and other FLSA protections.
The economic realities factors are non-exhaustive – i.e., a Wage and Hour Division auditor is free to consider additional factors – and, in contrast to the old rule, no single factor is more important than any other. The following list describes the six factors to clarify how the findings related to each would likely lead to a determination that an employee has been misclassified as an independent contractor:
The worker has little opportunity for profit or loss, depending on the worker’s managerial skill.
The company exercises a high degree of employer control over the worker, including setting the worker’s schedule and supervising the worker.
The employer has made a greater investment than the worker in equipping the worker to perform their job function.
The worker’s relationship with the company is relatively permanent, continuous, or exclusive.
The work performed is an integral part of the employer’s business.
The worker must acquire certain skills, and demonstrate some degree of initiative, to do the job.
Takeaways. After a long and unpleasant audit by the Labor Department, misclassifying a worker as an independent contractor can result in serious financial liability to a business for its failure to pay overtime, minimum wage, and the payroll taxes and benefits associated with employee compensation.
Also, as Kent Lang noted in his December 2022 article, “Piece Work Done Wrong,” violations of the Fair Labor Standards Act create burdens that extend beyond the company’s liability.
“In most cases,” Kent wrote, “the owners and any managers who have authority or responsibility for the payment of wages, withholding, and FICA are personally liable [emphasis added] for unpaid amounts. That liability is ‘joint and several’ – that is, each liable person is on the hook for the entire amount owed.”
If your company uses independent contractors, you should review your worker classifications to determine whether they will pass the expanded economic realities test, and you should consult a business employment attorney with any classification questions.
More about Mickell Summerhays and employer advocacy at Lang Thal King & Hanson.
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