According to the fashion websites I frequent daily, [OK, anyone who has ever seen you knows that’s a lie!] the outfit I wore in the 1975 Montgomery Ward Family Fashion Show (pictured above) is a retro fashion comeback for 2024! [Oh my! I don’t even know where to begin with that.] The same can be said for the “new” Final Rule on the proper classification of independent contractors recently implemented by the federal Department of Labor (“DOL”). So, if your business issues one or more 1099 NEC forms, please don’t skip this section.

The DOL has long asserted that businesses excessively misclassify workers as independent contractors. Based on my experience, businesses practicing intentional wholesale misclassification of workers are the exceptions. For the rest, worker misclassification is generally unintentional, based on the practicality of the situation, and due primarily to confusion regarding the rules. Then, the confusion is made worse because multiple state and federal agencies have promulgated their own rules in this area. So, for example, employers with operations in states where laws governing independent contractor classification are more restrictive – such as CA, NJ, and MA – may not understand that they must follow the more stringent rules in those jurisdictions.  

The new Final Rule, titled “Employee or Independent Contractor Classification Under the Fair Labor Standards Act” (“FLSA”), replaces one that took effect in 2021. Recycled from the Obama Administration, the 2024 version provides a six-factor test for determining independent contractor classification and focuses on whether each factor indicates the worker is economically dependent upon the employer.

The six factors are:

1. Opportunity for profit or loss depending on managerial skill: This factor focuses on whether the worker exercises managerial skill that affects their economic success or failure. Activities like actively marketing their services, negotiating contracts, and deciding which jobs to perform and when to perform them would help meet this test.
2. Investment by the worker: This factor evaluates whether the nature of the worker’s investment is capital or entrepreneurial. While costs such as tools, equipment, and the worker’s labor are not evidence of capital or entrepreneurial investment, paying expenses like rent, business insurance, and marketing services would satisfy this test.
3. Degree of permanence of the work relationship: This factor analyzes whether the work relationship is for a definite period or indefinite. Definite or sporadic relationships indicate independent contractor status, while indefinite or continuous relationships indicate employee status.
4. Nature and degree of control by the employer: This factor assesses whether the employer or the worker has substantial control over essential aspects of performing the work, including the worker’s schedule, supervision, and ability to work for others.
5. Whether the work is an integral part of the employer’s business: This factor considers whether the work performed is critical, necessary, or central to the company’s principal business. If so, that indicates the worker is an employee, not an independent contractor.
6. The worker’s skills and initiative: This factor examines whether the worker uses specialized skills necessary to perform the work and whether those skills support an independent business entity rather than the worker being economically dependent on the employer’s business.

Below are a few questions that are common when I discuss this topic with employers:

Q: What if the worker prefers or insists on working as an independent contractor?

A: The short answer is that it doesn’t matter. The classification rules apply regardless of whether the worker prefers or will only provide services as an independent contractor. I’ve seen several instances where workers insisted on being treated as independent contractors. Then, after a DOL auditor found they were misclassified, the employers were required to pay those same workers thousands of dollars in “unpaid overtime” and 100 percent of that amount in liquidated damages.

Q: Do the independent contractor rules apply if we have a written contract with the worker?

A: Yes, the rules still apply. I’ve seen written agreements that help support independent contractor classification and many more that provide evidence against it. For example, agreements that state the worker reports to a member of management, must provide weekly status reports, and is responsible for following all workplace policies.

Q: Are there any other potential issues and costs if an employer misclassifies workers as independent contractors?

A: Yes. Think of misclassifying workers as a Pandora’s box. [What does a music streaming service have to do with this?] Once identified (the box is opened), several potential issues may be unleashed. The misclassifications likely violated state and federal wage and hour, tax, immigration, healthcare, and employee benefits laws. The costs associated with these violations may include, but are not limited to:

• Local, state, and federal payroll taxes on the audit findings (previously unpaid wages/overtime);
• Local, state, and federal taxes – including the unpaid FICA taxes – as well as penalties and interest on the previously unpaid taxes;
• A claim for employee benefits that the worker didn’t receive because of the misclassification, such as 401(k), health and welfare benefits, vacation and sick leave, bonuses, and other benefits provided to employees in the same or similar positions.

Q: How can we eliminate the risk of misclassifying workers?

A: The only way to eliminate the risk is to eliminate the source of the risk – in this case, independent contractor relationships. Short of that, employers can minimize the risks associated with misclassifying workers by actively ensuring compliance with all applicable state and federal rules and regulations. That means:

• Conduct a worker classification review based on the framework provided in the DOL Final Rule and any state-specific rules. [I’m sure this is something HRCE would be happy to assist with; am I right?]
• Develop a plan to address any issues identified in the review, including quickly onboarding misclassified workers as employees.
• Develop and implement policies and procedures for properly classifying workers going forward, including a periodic review of independent contractor relationships to ensure ongoing compliance as applicable rules and regulations change.
• Consider engaging legal counsel with experience in worker classification to oversee and advise on the above actions.

NY State Updates

I’m sure you know NY State has minimum wage and salary threshold laws (which increased effective January 1, 2024). However, are you aware that the state also has laws and regulations regarding how employers can pay employees and even which employees can look to the DOL for assistance with wage theft claims? For example, NYLL §192 requires employers to obtain written permission from employees before they are allowed to “directly pay or deposit the net wage or salary of such employee in a bank or other financial institution.” The exception is employees working in “a bona fide executive, administrative, or professional capacity” with weekly wages of $900.00 or more. Effective March 13, 2024, the weekly wage limit for coverage under §192 will increase from $900 to $1,300.

Similarly, effective March 13, 2024, the DOL will reject wage theft claims from employees working in a bona fide executive, administrative, or professional capacity with a weekly wage of $1,300 (currently $900) or more. For these employees, the only avenue available to recover unpaid wages remains a civil lawsuit against the employer. [I have no idea what any of that means, but please don’t try to explain it!]    

Employers should also be aware that the NY State Freelance Isn’t Free Act is effective May 20, 2024. Patterned after the NYC law of the same name, the Act provides protections for freelance workers who are paid at least $800 for their work, including for multiple projects, over a 120-day period. Further, employers must provide freelance workers with a written contract and pay them within 30 days unless the parties agree to another payment schedule in advance. Freelance workers may not be retaliated against for exercising their rights under the Act, and they may take legal action to recover double damages and attorneys’ fees.

My field trip to Albany

As I mentioned above, my meetings in Albany centered around topics important to employers. First, in December 2023, Gov. Hochul vetoed Senate Bill S3100A, which would have banned non-compete agreements. The bill, which did not allow for exceptions – such as for non-competes entered into in conjunction with the sale of a business – also required the courts to award liquidated damages of $10,000.

With seemingly unscrupulous employers requiring low-wage employees to sign non-compete agreements, it’s clear that some guardrails are necessary. But a blanket ban is not the answer. With State Senator Sean Ryan announcing his intention to introduce a revised bill, we urged the legislature to take a measured approach in drafting legislation that balances the needs of both employees and employers.

I saved the best for last…[I don’t know if I can handle any more excitement!] With NY being the only remaining state with a COVID sick leave mandate, I was eager to discuss a sunset of the statute with anyone willing to listen. The good news is that two viable paths exist to sunset this mandate. First, bills have been introduced in the legislature to end the mandate. Without going into the minutia, [I could kiss you for skipping the boring details!] these bills offer somewhat complex but achievable processes. Secondly, Gov. Hochul included a proposal in her FY 2025 budget that, if passed, will sunset the COVID sick leave law on July 31, 2024. I assure you that my message was loud and clear: we don’t care how; end the COVID sick leave mandate as soon as possible!