Effective March 11, 2024
By Jessica A. Ramirez, JD
Originally published in Utah Physician Magazine, Feb/March 2024
In January, the U.S. Department of Labor (DOL) announced its new and final six-factor test for determining whether workers may be classified as independent contractors for purposes of the Fair Labor Standards Act (FLSA). The FLSA sets national minimum wage and overtime laws for practically all employees, including those in the healthcare industry. However, workers properly classified as independent contractors are not considered employees and, therefore, not subject to the minimum wage, overtime, and other requirements of the FLSA. As a result, changes to the independent contractor test for purposes of the FLSA have far-reaching implications for employers, including healthcare providers.
The DOL’s new rule returns to an “economic realities” analysis that had been used in prior years. The rule is intended to “protect workers from misclassification while at the same time provide a consistent approach for those businesses that engage (or wish to engage) with properly classified independent contractors.”
The Six Factors of the Economic Realities Test1
- Opportunity for profit or loss depending on the worker’s managerial skill,
- Investments by the worker and the potential employer, which considers whether any investments by a worker are capital or entrepreneurial in nature,
- Degree of permanence of the work relationship, which weighs in favor of employee status when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers,
- Nature and degree of control over the performance of the work and the economic aspects of the working relationship,
- The extent to which the work performed is an integral part of the potential employer’s business, and
- Skill and initiative, which considers whether the worker uses specialized skills to perform work and whether those skills contribute to business-like initiative.
The new test rescinds a prior standard enacted in 2021, which prioritized two “core factors” —the nature and degree of control over the work and the worker’s opportunity for profit or loss—and granted them more weight. Now, under this new standard, no one single factor or subset of factors is necessarily dispositive2. Moreover, the DOL also allows for additional factors to be considered to the extent they demonstrate that a worker “is in business for themself, as opposed to being economically dependent on the potential employer for work.”
The DOL’s change to the independent contractor test may be particularly impactful for the classification of workers in the healthcare industry. The healthcare industry has recently experienced an increase in the use of contract staff for nursing and other care positions. These contract workers have often been classified as independent contractors. The new independent contractor test, however, is likely to increase the number of workers that should be classified as employees, therefore resulting in a greater risk of misclassification. For example, certain contract nurses should likely be considered employees under the FLSA, not independent contractors, under circumstances where nursing is an integral part of the practice, the clinic dictates standards for the nursing practice, nurses are hired for an extended period of time, nurses are subject to the same scheduling standards as other staff, and nurses are required to work exclusively for the employer.
In short, workers may be classified as independent contractors and, therefore, exempt from the FLSA if the six (potentially 7) factor test weighs against employee status and the economic realities of the position show that the workers are, in many regards, in business for themselves. If that is not the case, then the workers are likely to be considered employees under the FLSA.
Failure to properly classify employees may result in large penalties including unpaid overtime and minimum wage deficits, and even attorney’s fees. With the implementation of this new test, employers are encouraged to reevaluate all independent contractor positions and reduce the risk of misclassification and exposure to wage claims. Notably, it is important to remember that the DOL’s
new test is separate and distinct from the test to establish independent contractor status for purposes of the Internal Revenue Code and other laws. While the tests are similar in many regards, there are some critical distinctions. Accordingly, healthcare providers and employers are encouraged to consult with legal counsel to ensure that all positions are properly classified as independent contractors under all relevant state and federal laws.
ENDNOTES
1. 29 CFR § 795.110(2)(b) www.federalregister.gov
2. 29 CFR § 795.110(2) www.federalregister.gov
3. Employee or Independent Contractor Classification Under the Fair Labor Standards Act. www.federalregister.gov/documents/2024/01/10/2024-00067/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act
4. Disclaimer: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on the situation.
Jessica A. Ramirez, JD
moc.nqr@zerimarj
801-323-3690
Jessica A. Ramirez, JD, is an associate attorney at Ray Quinney & Nebeker, practicing in the Employment and Labor Law, Litigation, and Healthcare sections. Ms. Ramirez represents employers in a wide range of employment- related issues, including litigation defense and general employment compliance advice, and advises clients on healthcare privacy compliance issues. She also has experience conducting internal investigations related to wage claims and other employment related discrimination claims.