The DOL issued a final rule, effective March 11, 2024, that will force companies to treat some workers as employees rather than less expensive independent contractors. The final rule revised the Department’s guidance on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA).

As to employee health and welfare benefit programs having an individual who has been hired by an employer by an independent contractor not only are they entitled to back pay at a higher rate, but also, are entitled to employee benefits of the employer and can be catastrophic. One need not use much imagination to understand the complexity and potential cost of determining the value of benefits not provided to an individual during the period in question. Plan documents, especially wrap plan documents, properly drafted may significantly mitigate such issues were argued by an independent contractor. Employers should check their documents to ensure that under such circumstances these individuals would still be excluded by the terms of the applicable plans.

The distinction between employees and independent contractors is crucial for employers to understand due to the different legal obligations and responsibilities that come with each classification. Employees typically have certain protections under federal and state labor laws, such as minimum wage requirements, overtime pay, and unemployment insurance, among others. Employers are responsible for withholding taxes from employees’ wages and contributing to various benefits programs.

In contrast, independent contractors are considered self-employed individuals who work on a contract basis and are responsible for their own taxes, insurance, and benefits. Employers generally do not have the same level of control over independent contractors as they do over employees, and they are not typically liable for the actions of independent contractors in the same way they are for employees.

However, determining whether a worker should be classified as an employee or an independent contractor can be challenging, as there is no universal “bright line” test. The final rule rescinds a 2021 rule in which two core factors—control over the work and opportunity for profit or loss—carried greater weight in determining the status of independent contractors. Under the new rule, employers would use a totality-of-the-circumstances analysis, in which none of the factors carry greater weight.

The new test includes six factors:

1. The degree to which the employer controls how the work is done.

2. The worker’s opportunity for profit or loss.

3. The amount of skill and initiative required for the work.

4. The degree of permanence of the working relationship.

5. The worker’s investment in equipment or materials required for the task.

6. The extent to which the service rendered is an integral part of the employer’s business.

Given the complexities involved, employers play a crucial role in ensuring proper classification of workers and compliance with relevant laws and regulations. It’s essential for employers to carefully assess the circumstances of each working arrangement and seek legal advice if needed to avoid potential misclassification issues and related liabilities. Alternatively, organizations or individuals can request an official determination of a worker’s status under the IRS test by filing IRS Form SS-8.

As to an employer’s health and welfare benefit programs, a good place to start is to review the plan document’s language regarding such arrangements. Most likely an employer does not intend to include persons it has hired as an independent contractor in its health and welfare benefit programs. Here, clear language should be included in its wrap plan documents addressing this important issue. That is, language should be included in that gives an employer a strong position to represent that regardless of individuals who have been engaged as independent contractors but are subsequently determined by the DOL or a court of law to be employees, they nonetheless will not retroactively be included in such program or programs. Good documents can help protect and mitigate the employer’s exposure to time-consuming and costly lawsuits.

For additional information see the Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act, RIN 1235-AA43

Link: https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking