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Understanding the DOL’s New Final Rule on Independent Contractor Classification

The landscape of employment and labor law is ever-evolving
and staying informed is crucial for both employers and workers. In a recent and long-awaited development, the United States Department of Labor (“DOL”) published a new Final Rule on January 10, 2024, set to take effect on March 11, 2024. This rule introduces substantial changes to the classification of independent contractors under the Fair Labor Standards Act (“FLSA”), rescinding the more business-friendly 2021 Independent Contractor Rule.

The DOL’s Final Rule – Independent Contractor v. Employee

The final rule establishes a revised framework for determining whether a worker should be classified as an independent contractor or an employee. This new rule places renewed emphasis on a worker’s economic dependence on an employer, assessed through a totality of the circumstances test long utilized by the courts. Under the rule, the six key factors for evaluating a worker’s relationship with an employer include: any opportunity for profit or loss a worker might have; the financial stake and nature of any resources a worker has invested in the work; the degree of permanence of the work relationship; the degree of control an employer has over the person’s work; whether the work the person does is essential to the employer’s business; and the worker’s skill and initiative.

Within this framework, it’s crucial to note that no single factor is deemed determinative or holds conclusive weight. Furthermore, considerations beyond the six outlined above may also be relevant to determining a worker’s economic dependence on an employer.

Massachusetts’ “ABC” Test – Independent Contractor v. Employee

However, it is important to highlight that this final rule only changes the DOL’s interpretation under the FLSA and doesn’t impact other federal, state, or local laws. Employers must remain cognizant of state laws that impose more stringent tests, such as the “ABC” test used in Massachusetts to determine the appropriateness of an independent contractor classification. The ABC test – which is harder to satisfy than its federal counterpart (the DOL final rule) – requires that three elements exist for an individual to be classified as an independent contractor:

  • the absence (i.e., the “A”) of control and direction in the individual’s work;
  • that the business (i.e., the “B”) of the employer is different from the services the individual provides; and
  • that the individual is customarily (i.e., the “C”)
    engaged in an independent trade or business.

The burden of proof in this ABC test is on the employer, and the inability of an employer to prove any one of the prongs is sufficient to conclude that the individual in question is an employee and not an independent contractor.

Risks of Misclassification

Misclassifying employees as independent contractors poses
several significant risks for businesses, both financial and legal. Some consequences include:

Penalties and fines: liability for back taxes and associated penalties for paying late;

Back wages and benefits: liability to workers for lost wages or benefits that resulted from misclassification; and

Legal issues: exposure to lawsuits from groups or individuals harmed by misclassification.

It is important to note that the Massachusetts Independent Contractor Law is part of the Massachusetts Wage Act. Any violation of the Wage Act – including misclassification – will result in the imposition of triple damages and payment of the plaintiff’s attorneys’ fees, plus interest at a rate of 12% per annum. Keep in mind that there is no similar fee-shifting provision if a company  successfully defends a misclassification lawsuit; e.g., if the company prevails, the plaintiff does not have to pay its attorneys’ fees.

In light of these changes, employers should thoroughly
review the new rule and update their classification policies and any independent contractor agreements accordingly.

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