This is an update to an earlier blog published on October 23, 2024
Misclassification can be expensive for your business.
In today’s economy, where many workers desire flexibility through what is commonly called “gig work,” it is critical for employers to know whether a given worker may be classified as an independent contractor, or whether that worker is more appropriately classified as an employee. It is essential for employers to understand the rules under the Fair Labor Standards Act (“FLSA”), and the enforcement power of the U.S. Department of Labor Wage and Hour Division (“USDOL”).1
Effective May 1, 2025, USDOL announced a significant change in enforcement policy under the FLSA. Rather than enforcing a final rule on classification issued in March 2024, USDOL will instead apply a classification framework originally set out in a 2008 guidance document.
A bit of historical context is important here. USDOL did not historically undergo rulemaking and publish final rules regarding classification of employees versus independent contractors. That changed in the first Trump administration, with USDOL engaging in rule making which culminated in a final rule published in January 2021, just as the Biden administration was taking office. That rule identified two “core factors” to be considered in classification: (1) nature and degree of control over the work; and (2) the worker’s opportunity for profit or loss.
The January 2021 rule was immediately challenged by several federal lawsuits. The Biden administration then undertook its own rulemaking, culminating in a final rule effective March 11, 2024, found at 29 C.F.R. Part 795. The March 2024 rule required consideration of at least six factors, none of which was individually determinative:
- A worker’s opportunity for profit or loss depending on managerial skill.
- Investments by the worker and the employer.
- The degree of permanence of the work relationship.
- Nature and degree of control over work.
- Extent to which the work in question is an integral part of the potential employer’s business.
- Skill and initiative the worker uses to perform the work.
Somewhat predictably, the March 2024 rule was also immediately challenged in court.
The second Trump administration took office in January 2025. Now, effective May 1, 2025, USDOL announced that it will not enforce the March 2024 rule. USDOL is also considering whether to rescind the March 2024 rule, but it for sure it is not currently being enforced. USDOL has instead reverted to guidance that it used way back in 2008. See Fact Sheet #13: Employment Relationship Under the Fair Labor Standards Act (FLSA). That “guidance” was not a formal rule but was instead based on the “economic realities” test that federal courts commonly used to determine whether a worker is an employee. The guidance highlighted seven factors, the “totality” of which should be considered:
- The extent to which the services provided are an integral part of the business.
- The permanence of the relationship.
- The worker’s investment in facilities and equipment.
- Nature and degree of control over work.
- The worker’s opportunity for profit and loss.
- The worker’s initiative, judgment, and market competition with others.
- The degree of the worker’s independent business organization and operation.
The guidance also pointed out several things that are considered irrelevant in the analysis, such as where the work is performed, whether there is a formal agreement, or whether the worker is licensed by a state or local government.
Confused? There is no doubt that this whipsawing on rules and enforcement has produced considerable uncertainty for employers. What is clear, however, is that misclassification of workers remains a significant potential liability for employers. If USDOL finds that workers have been misclassified, it can order an employer to pay unpaid overtime compensation going back two years. It can also assess “liquidated damages,” which has the effect of doubling any overtime compensation owed to misclassified workers. And, importantly, liability for unpaid overtime compensation under the FLSA can also fall on company owners, as the FLSA defines “employer” to “include[e] any person acting directly or indirectly in the interest of an employer in relationship to an employee.” 29 U.S.C. § 503(d). Courts have interpreted that provision as making corporate officers / owners jointly and severally liable with the corporation for unpaid wages under the FLSA.
Do you have questions about how the Fair Labor Standards Act applies to your business? And how USDOL will enforce it? Reach out to L4SB today for answers.
Law 4 Small Business (L4SB). A Slingshot company. A little law now can save a lot later.
