L&E Legal Alert – New FLSA Rule – Employee or Independent Contractor Classification
New FLSA Final Rule – Employee or Independent Contractor Classification
On March 11, 2024, the new rule related to the Employee or Independent Contractor Classification Under the Fair Labor Standards Act (FLSA) will go into effect.
This rule will apply to those enterprises and/or individuals covered by the FLSA. In order to be covered the employer must have at least two employees and have an annual dollar volume of sales or business of at least $500,000. It will also apply to hospitals, businesses providing medical or nursing care for residents, schools and preschools, and government agencies. Finally, individuals will be covered if their work regularly involves them in commerce or in the production of goods for commerce. The rule replaces the Department of Labor 2021 Independent Contractor Rule established by a previous administration.
The Department believes that the 2021 rule limited facts that may be considered as part of the test to determine if an individual is an employee or an independent contractor. For such analysis, the Department is reinstating the long-standing multifactor “economic reality” test used by courts prior to the 2021 rule. The analysis under the final rule relies on the totality of the circumstances where no one factor is determinative, nor one single factor automatically determines a worker’s status as either an employee or an independent contractor.
The multifactor test includes the following components:
(1) If the individual has opportunity for profit or loss depending on managerial skill;
(2) If there are investments by the worker and the potential employer;
(3) The degree of permanence of the work relationship;
(4) The nature and degree of control;
(5) The extent to which the work performed is an integral part of the potential employer’s business; and
(6) The skill and initiative.
Under the final rule the analysis may even consider additional factors (to the six listed above) if they are relevant to determine, as a matter of economic reality, if a worker is economically dependent on an employer or in business for themselves, and thus an independent contractor.
For Puerto Rico employers to whom the FLSA applies, the analysis must also include relevant dispositions of Act No. 4 of 2017. The Act eliminated the “economic reality test” when determining if an individual is an employee or an independent contractor. Thus, as of today, one same individual might be classified as an employee under FLSA and an independent contractor under Act. 4 of 2017. Employers must thoroughly consider all applicable criteria for a proper classification.
Our Labor & Employment practice group is available to answer any question or assist with the implementation of these new amendments.
Please contact us at labor@estrellallc.com.