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U.S. Department of Labor’s Changes Poised to Take Effect in 2024, But Challenges Likely

The U.S. Department of Labor (“DOL”) is poised to make significant changes this year to various wage-and-hour regulations interpreting the Fair Labor Standards Act (“FLSA”). The changes are expansive and include both the already released independent-contractor test and increases to the salary threshold for white collar exemptions. These changes will effect employers across the country in all industries. Nonetheless, they are not going unchallenged. The expected legal challenges to the changes have already begun and will likely continue to mount.

The New Independent Contractor Test

On January 10, 2024, the DOL published its final rule regarding the test for determining whether workers are independent contractors or employees under the FLSA. The test is important because, among other things, the FLSA’s minimum wage and overtime provisions do not apply to independent contractors. The rule becomes effective on March 11, 2024 (absent a court order or other action), and rescinds and replaces the Trump-era test published in 2021 (“2021 Rule”).

According to the DOL, the new rule codifies the “economic realities” test, which is used to determine whether workers are economically dependent on an employer (and, thus, employees) or whether they are actually in business for themselves as independent contractors. The new rule sets out the following six factors that must be considered in making an independent contractor determination.

  1. The worker’s opportunity for profit or loss;
  2. The investments made by the worker and the potential employer;
  3. The degree of permanence of the work relationship;
  4. The degree of control a potential employer has over the work;
  5. The extent to which the work performed is integral to the potential employer’s business; and
  6. The use of a worker’s skill and initiative.

No one factor is given any particular weight and the relationship should be viewed in totality of the circumstances with an eye toward determining whether the worker is economically dependent on the potential employer. Additional factors may also be considered if they are relevant to the overall question of economic dependence. The new rule does not enumerate these additional factors, but are meant to give courts flexibility to consider the question of economic dependence or independence, regardless of whether those facts fit within one of the above-listed factors.

The practical result of this change is that more workers likely will be classified as employees under the FLSA and therefore, entitled to minimum wages and overtime pay. To be in compliance with the law, businesses should consider reassessing their independent contractor classifications under the new rule, and making changes where needed. Such changes could require increased overtime costs, as well as payment of Social Security, Medicare and other payroll-related taxes, and providing employee benefits.

Due to these additional costs, businesses reliant on independent contractors are pushing back. When President Biden previously withdrew the 2021 Rule, a lawsuit was filed in the U.S. District Court for the Eastern District of Texas, which made its way up to the U.S. Court of Appeals for the Fifth Circuit.  The court ruled that the withdrawal was improper and reinstated the 2021 Rule. The case was stayed pending new rule making.  On January 11, 2024, the plaintiff business organization filed a motion to revive the previous litigation.  Additionally, on January 16, 2024, a group of freelance writers filed a lawsuit in the U.S. District Court for the Northern District of Georgia alleging that the new rule does not align with precedent from the U.S. Supreme Court. These freelance writers currently are classified as independent contractors and believe they will negatively affected in they are classified as employees.

The saga is far from over, but for now, businesses using independent contractors will want to review their relationships given the new guidance to ensure they are not exposed to the risks associated with misclassification.

White Collar Exemption Salary Threshold Changes

The DOL also has proposed changing the thresholds for the salaries under the white collar exemptions, which are expected to be released this spring. Much like the independent contractor rule, changes to the salary threshold are anticipated to be met with resistance by the business community.

While the FLSA requires that most employees be paid an overtime premium for hours worked in excess of 40 hours in a workweek, there are several exemptions to the requirement. Some of the most common exemptions are called “white collar exemptions” and they cover certain executive, administrative, professional, outside sales, and certain computer-related employees. To qualify for most of the white collar exemptions, employees must meet a strict set of requirements. These requirements include (1) being paid on a salary basis (with some exceptions) of at least $684.00 per week or $35,568.00 annually (the current threshold), and (2) meeting a primary duties test. The new rule would significantly increase these amounts.   

On September 8, 2023, the DOL issued a proposed rule that would raise the salary threshold to $1,059.00 per week ($55,068.00 annually), an increase of 55% from the current amount. Additionally, the proposed rule includes the adoption of automatic updates to the earnings threshold in future years allowing for the predictable increases. The proposed rule received over 33,000 comments, receiving harsh criticism from the business community. The DOL is expected to issue its final rule in April 2024 and has made no indication that it intends to deviate from the proposed amounts. The final rule would become effective 60 days after publication, though it is likely that there will be legal challenges.

While employers will certainly want to follow this issue closely, now is the time to review your compensation packages. Should these changes become effective, to maintain exempt status, employers may either raise their salaries or reclassify employees as non-exempt and pay overtime.

Civil Money Penalties Changes

While not nearly as controversial as the above topics, the DOL has also made changes to its civil money penalties (“CMPs”). CMPs are fines aimed at creating a deterrence to violating the law. The law requires agencies across the federal government to adjust their penalties for inflation no later than January 15 of every year. On January 11, 2024, the DOL issued its final rule regarding civil money penalty amounts. The highlights are as follows:

  • Repeated or willful violation of the FLSA’s minimum wage and overtime sections increased to a maximum of $2,451.00;
  • A violation of the FLSA’s child labor standards increased to a maximum of $15,629.00;
  • Violation of the requirements of the Occupational Safety and Health Act’s (“OSH Act”) standards and rules increased to a maximum of $16,131 per day; and
  • Willful or repeated violations of the OSH Act’s standards and rules increased to a maximum of $161,323.00.

Employer Considerations

Labor and employment continues to be a hot topic in this political atmosphere. Employers utilizing independent contractors should review their relationship with those workers to minimize the risk of liability associated with misclassification. Also, employers with exempt employees making less than $55,068.00 annually should review their strategy now in anticipation for the proposed changes going into effect in late spring or early summer.

  • Elaina S. Bailey

    Elaina Bailey is a seasoned labor and employment attorney with a passion for problem-solving and a commitment to achieving favorable outcomes for her clients. With a wealth of experience in administrative investigations and ...

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