The U.S. Department of Labor (DOL) has introduced a new final rule that changes how workers are classified as either independent contractors or employees under the Fair Labor Standards Act (FLSA), advises DunlapSLK, a CPA and business advisory firm based in Chalfont.

This new rule, which went into effect March 11, 2024, replaces the previous employer-friendly test from the Trump Administration with a more employee-centric approach, and is expected to significantly influence DOL misclassification audits and enforcement actions. Misclassifying employees as independent contractors could lead to owing back pay, paying penalties, and being liable for withheld employee benefits.

The rescinded Trump Administration’s test emphasized the economic reality of whether workers are dependent on their employer or running their own business, focusing on the employer’s control and the worker’s opportunity for profit and loss. The final new rule revisits these concepts but introduces a six-factor test to determine employment status under the FLSA. These factors include the worker’s opportunity for profit or loss depending on managerial skill, investments by the worker and potential employer, the degree of permanence of the work relationship, the nature and degree of control by the employer, the extent to which work performed is integral to the business, and the worker’s skill and initiative.

And if you are wondering if an individual can be an employee for FLSA purposes even if he or she is an independent contractor for tax purposes, the answer is yes. The DOL addresses this issue in a series of Q&As.

The DOL’s final rule change has already sparked legal challenges, but it’s crucial for employers using freelancers and independent contractors to review your work relationships and make appropriate changes if necessary.

Learn more from DunlapSLK about how the U.S. Department of Labor’s new final rule on independent contractors vs. employees can affect your business.