DOL Gives Extra Leeway for Independent Contractor Classification

The U.S. Department of Labor (DOL) has announced it will not apply the 2024 independent contractor rule, which narrowed the scope of independent contractor classification, in its enforcement of the Fair Labor Standards Act (FLSA). While the announcement will make it easier for employers to classify workers as independent contractors, the 2024 rule remains intact for purposes of private litigation.

But litigation in the five pending cases challenging the 2024 rule has been delayed or is in mediation, noted Camille Olson, an attorney with Seyfarth in Chicago, San Francisco, and Los Angeles.

“HR professionals should focus on accurate classification of workers under specific tests that are applicable in the jurisdiction in which the worker performs services,” Olson said. The tests can vary widely from state to state.

Employers also should audit anyone who is getting a 1099 form and re-evaluate their status under the guidelines just readopted by the DOL, as well as applicable state laws, said Robert Boonin, an attorney with Dykema in Ann Arbor, Mich.

“In the course of the audit, consult with experts and if the worker is to remain classified as an independent contractor, document how that determination was made,” Boonin said. Doing so may greatly reduce the employer’s exposure to double damages and prevent an extra year of liability, even if it’s later determined that the worker should have been classified as an employee, he explained.

Toolkit: Employing Independent Contractors

What’s Changed?

The 2024 rule required a complex, employee-friendly analysis — which focused on a holistic review of the totality of the circumstances — to ascertain whether a worker was a contractor or an employee, said Jonathan Clark, an attorney with Sheppard Mullin in Dallas. “The DOL investigators will now return to the traditional, economic realities test to determine whether an individual is an employee or an independent contractor,” he said.

In its announcement that it would not enforce the 2024 rule, the DOL reinstated Opinion Letter FLSA 2019-6 as Opinion Letter FLSA 2025-2. This opinion letter concluded that independent contractors receiving work through a virtual marketplace app are properly classified as independent contractors under the FLSA, Olson said.

“Practically speaking, this change is welcome for businesses who contract with independent workers to either provide services or [are] on a multisided platform,” she said.

“The rulemaking pingpong continues under another new federal administration,” said Michael Schmidt, an attorney with Cozen O’Connor in New York City.  

The following nonexhaustive factors now will guide the DOL’s assessment of whether a worker is properly classified as an independent contractor: 

• Opportunity for profit or loss depending on managerial skill.
• Investments by the worker and the employer.
• Permanence of the work relationship.
• Nature and degree of control.
• Whether the work performed is integral to the employer’s business.
• Skill and initiative.

“This approach provides greater clarity for businesses and workers navigating modern work arrangements while legal and regulatory questions are resolved,” the DOL said.

Consequences of Misclassification

Workers who are classified as independent contractors may prefer that classification and the freedom that comes along with the traditional relationship such contractors have with the entity engaging them for services, said Jason Reisman, an attorney with Blank Rome in Philadelphia.

However, the consequences of misclassification can be significant, including often lengthy and expensive class actions, Schmidt said.

Successful plaintiffs can recoup unpaid overtime for hours worked over 40 hours in a workweek, which can be doubled over a two- or three-year period, plus attorney fees, said Margaret Santen, an attorney with Ogletree Deakins in Charlotte, N.C., and Atlanta.

“While the federal DOL has backed off of its 2024 rule, the states continue to be very aggressive in enforcement efforts in this area,” particularly California, Illinois, Massachusetts, New Jersey, and New York, Santen said.  

In California, employers may have greater liability for unpaid overtime to misclassified workers than under the FLSA because most nonexempt employees in the state must be paid for work over eight hours in a day, in addition to being paid overtime when they work more than 40 hours in a workweek, said Wendy Lane, an attorney with Greenberg Glusker in Los Angeles.

If the misclassified individuals did not receive meal and rest breaks in compliance with California’s requirements, the employer also will be liable for missed meal and rest period premiums. 

Toolkit: California Overtime Payment Law

In addition, misclassification can result in consequences under federal laws beyond the FLSA. 

While many federal laws use the term “employee,” such as the National Labor Relations Act, Title VII of the Civil Rights Act, and the Internal Revenue Code, these definitions are often unclear and typically rely on a circular definition such as the FLSA’s “an individual employed by an employer.” As a result, there are noted inconsistencies in the application of worker classification across federal laws, as highlighted in SHRM’s March 25 testimony on improving the FLSA.

Under many federal laws, potential, current, and past employees are entitled to certain protections that nonemployees, including independent contractors, do not receive. Misclassified workers who should be considered employees under civil rights laws may be entitled to protection under anti-discrimination laws. Misclassified workers also may be entitled to benefits other employees receive, Reisman said. And they may be entitled to unpaid and paid leave under federal, state, and local laws.

An employer must provide workers’ compensation coverage for employees and make unemployment compensation contributions for them. Employers will also have potential IRS tax liabilities, such as payroll taxes.

“HR professionals should be careful to monitor the use of any independent contractors, review any agreements used with them, and ensure practices used with independent contractors truly meet the applicable tests to support the classification,” Santen said. Regular auditing, ideally under the attorney-client privilege, is critical, she added.

HR also should mold the parameters of jobs so that the independent contractors have control of the method and manner of their work, Reisman said.