DOL Issues New Guidelines for Employee Classification: What Employers Need to Know

The U.S. Department of Labor (DOL) recently announced its final rule regarding the proper classification of independent contractors and employees under the Fair Labor Standards Act (FLSA). The rule separately rescinds the employer-friendly 2021 Independent Contractor Rule, deeming it inconsistent with longstanding legal precedent and inadequate for appropriate oversight.

At Gross McGinley, LLP, our business lawyers in Pennsylvania help HR professionals and business owners take proactive steps to ensure adherence to the most current labor and employment laws. We can help you understand the new Department of Labor guidelines and avoid worker misclassification and potential liability.

Factors Affecting the New FLSA Employee Classification Requirements

Slated to take effect on March 11, 2024, the updated guidelines align with restoring the multi-factor analysis that the courts have used for decades to address misclassification of workers. These new guidelines mark a return to the totality-of-the-circumstances assessment. 

Under the new DOL requirements, courts must consider six economic reality factors when determining whether a worker is an employee or independent contractor:  

1. Worker’s opportunity for profit and loss 
2. Investments by the worker and employer 
3. Degree of permanence of the work relationship 
4. Nature and amount of worker control 
5. Extent to which the work performed is an integral part of the employer’s business
6. Level of skill and initiative 

Keep Current With New Labor Requirements 

Employers should be mindful that the new DOL independent contractor rule fortifies the emphasis on a worker’s economic dependence on the employer and may intensify classification challenges in an already complex area of law. Although the Department of Labor has expressed plans to provide guidance on properly applying the new rule, employers are wise to keep a close eye on court challenges and other developments. 

Notably, the new rule only affects the DOL’s interpretation under the FLSA and does not impact other state or local laws that have different criteria for worker classification. Therefore, employers must be careful to adhere to jurisdiction-specific standards, which can depart from or be more restrictive than federal requirements. An employment attorney who is familiar with state and local regulations can help to ensure your business adheres to any applicable laws. 

How Employee Classification Works in Pennsylvania 

In Pennsylvania, courts generally use a ten-pronged test to evaluate independent contractor status. However, the Pennsylvania Supreme Court applies the six-part economic reality test to unpaid wage and unpaid overtime claims. The variations in tests applied by the courts in Pennsylvania often cause unpredictable results and confusion. 

It’s important to note that many states have adopted the ABC test for determining worker classification. The test presumes that the worker is an employee unless the employer can prove all these three factors: 

1. The individual is free from control and direction by the employer 
2. The individual performs tasks that are outside the employer’s core business
3. The individual is engaged in an independently established trade of the same nature as the employer 

Under the ABC test, if the hiring entity fails to satisfy any one of these three criteria, the worker should be classified as an employee, which usually entails a broader range of labor protections and benefits. Pennsylvania is contemplating the adoption of the ABC test, which could put businesses at risk of being penalized for worker misclassification. 

Understanding the Impact of Worker Misclassification Exposure 

Worker misclassification penalties under FLSA can be severe and depend on several factors, such as the size of the business and the length of time the company failed to provide employment benefits. 

When a worker is misclassified as an independent contractor, the employer avoids paying FICA taxes, including social security and income tax withholdings. Additionally, employers may be required to compensate misclassified workers with back wages and benefits, such as overtime pay, health care, and retirement contributions. 

States also can levy their own penalties for misclassification under their respective labor laws. For example, the Pennsylvania Construction Workplace Misclassification Act (the “Act”) prohibits the misclassification of individuals in the construction industry as independent contractors. 

The Pennsylvania Department of Labor & Industry (L&I) has the authority to assess civil penalties of up to $1,000 for the first violation and up to $2,500 for each subsequent employee classification violation. In October 2023, L&I reported that since enacting the Act in 2011, it has cited over 900 construction contractors for violations of the Act and collected over $3 million in fines. 

In addition to costly fines, a high-profile misclassification case can significantly damage a company’s reputation, cause employees to leave, and dissuade potential contractors and employees from working with or for the organization. 

Systemize Compliance With Employee Classification Rules 

Even if unintentional, worker misclassification can expose businesses to substantial liability. To get ahead of this risk, many businesses in Pennsylvania are proactively engaging business attorneys and employment lawyers to ensure that worker relationships are structured correctly from the outset. 

An employment attorney can advise companies on appropriate worker classification, help manage compliance risk, and assist businesses with structuring their labor and employment agreements and working relationships to minimize the exposure to misclassification claims. A lawyer also can provide timely counsel on changes to workplace laws and regulations. 

Access to the expertise of experienced business attorneys ensures that employers stay on track with regulatory compliance, mitigate legal exposure, and prevent penalties and reputational damage. 

Find a Business Law Attorney You Can Trust at Gross McGinley, LLP

For more than 40 years, Gross McGinley, LLP, has provided top-notch legal representation to clients in Pennsylvania. We provide a wide range of services in varied areas of the law, including business and employment law, criminal defense, family law, litigation, estate planning, real estate, and more. To schedule a consultation with a business law attorney in Allentown, PA, contact us or call 610-820-5450.