The Wage and Hour Division of the U.S. Department of Labor should soon publish its final rule on the classification of employees and independent contractors under the Fair Labor Standards Act (FLSA). The rule replaces changes by a previous administration and establishes the regulatory basis on which classification of employees and independent contractors is to be determined. This proposed rule received nearly 55,000 comments, and a final rule is presently slated for release in August 2023, though that is not a firm deadline.
Many employers pay workers in the construction industry as independent contractors and utilize an IRS Form 1099 to reflect these payments. Certain federal laws, including the FLSA, do not apply to independent contractors. This leads some employers to misclassify employees as independent contractors. While this may simplify and reduce labor costs, it can produce costly liability for violations of the FLSA. The pending rule offers guidance for employers regarding classification; however, due to the nature of the test, no outcome is certain, and consultation with an attorney at Anderson Jones, PLLC is advisable if you have questions on this topic.
Overtime Pay With Traditional Employees
Under the FLSA, non-exempt employees are entitled to overtime pay for time worked in excess of 40 hours in 7 consecutive 24 hour periods as established by an employer. The rate of overtime pay is 1.5 times the employee’s regular hourly rate.
Overtime Pay With 1099 Independent Contractors
True independent contractors, often referred to as 1099 workers due to the tax form they receive, are not employees and are not subject to the overtime requirements of the FLSA. Independent contractors may work in excess of 40 hours during an employer-designated work week without payment of overtime. Their payment should be in accordance with terms of a contract between the contractor and the person or entity retaining their work.
Judicial applications of the FLSA developed the “economic reality” test to ascertain whether a worker was an employee or an independent contractor. The Trump administration proposed a rule that weighted two factors considered under this test, and the Biden Administration has removed the weight given those two factors. The proposed rule describes the means by which the Wage and Hour Division will assess classification. The rule looks at a variety of factors to determine if a worker is truly an independent contractor or effectively an employee. If a worker is misclassified, he or she may pursue a claim under the FLSA.
What Is The FLSA?
The Fair Labor Standards Act (FLSA) is applied widely to businesses and individuals according to different criteria. It may not apply in federally regulated industries or if a more narrowly applicable federal law provides minimum wage protections. Employees or groups of employees can pursue a claim for damages for an employer’s failure to pay in accordance with the FLSA. An award can include liquidated damages equal to the amount of actual damages. An employer acting in good faith with reasonable grounds to believe it had complied may avoid or limit an award of liquidated damages.
What is the Proposed Rule?
In October 2022, the Wage and Hour division published a proposed rule on classification of employees and independent contractors under the FLSA. An extended comment period was allowed, and a final rule is presently slated for release in August 2023. The final rule may vary from the proposed rule; however, the proposal closely tracked the existing judicial standard. The proposed Rule examines the totality of the circumstances considering the following factors:
- Opportunity for profit or loss based on managerial skill
- Investments by the worker and purported employer
- Degree the work relationship is permanent/continuing
- Nature and Degree of Control by the employer (scheduling, supervision, setting remuneration, ability to work for others)
- Degree that work performed is integral part of employer’s business
- Skill and business initiative of the worker
- Additional factors, a catchall to consider all facts not readily categorized
Contact The Employment Law Team At Anderson Jones
If your business needs guidance on matters related to employment laws, such as overtime pay regulations, employee classification, or other labor standards, it’s crucial to seek legal advice.
With the complexity and ever-evolving nature of these laws, having the counsel of a seasoned employment lawyer can protect your company from potential disputes or legal issues down the line. Contact us today to schedule your consultation!