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California has clearly established a very liberal test to resolve the classification of an employee or independent contractor by its passage of AB-5 which codified the A-B-C test. For workers’ compensation claims under California jurisdiction, the A-B-C test is appropriate. However employers with out-of-state employees need to be aware that there are other standards.

For example, this week the Department of Labor published a final rule, Employee or Independent Contractor Classification Under the Fair Labor Standards Act, to provide guidance on whether a worker is an employee or independent contractor under the FLSA. This rule will help to ensure that workers who are employees are paid the minimum wage and overtime due them, and that responsible employers that comply with the law are not placed at a competitive disadvantage when competing against employers that misclassify employees.

Importantly, the final rule rescinds the Trump administration 2021 Independent Contractor Rule, which the DOL believes is out of sync with longstanding judicial precedent and increased the likelihood of misclassification. The new rule’s realignment of the department’s guidance with judicial precedent will reduce confusion, improve compliance and better protect working people.

Specifically, the final rule revises the department’s guidance by:

– – Returning to the multifactor, totality-of-the-circumstances analysis to assess whether a worker is an employee or an independent contractor under the FLSA.
– – Explaining that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
– – Using the longstanding interpretation of the economic reality factors. These factors include opportunity for profit or loss depending on managerial skill, investments by the worker and the potential employer, the degree of permanence of the work relationship, the nature and degree of control, the extent to which the work performed is an integral part of to the potential employer’s business, and the worker’s skill and initiative.

The DOL claims that the “economic reality test in our new regulations is nimble enough to continue to provide a useful analysis for the broad range of work arrangements that exist today. The final rule will help the Wage and Hour Division to continue addressing misclassification and prioritizing the most vulnerable workers who are being misclassified – because that’s what we must do. In addition, the rule will help to ensure that independent contractors, including freelancers, who are in business for themselves are properly classified. We recognize that independent contractors play an important role in our economy – and this rule won’t change that.”

“Proper classification of employees and independent contractors results in workers who are employees under the FLSA receiving the hard-earned wages and protections they’re legally entitled to, while also ensuring that independent businesses continue to thrive. Employees across industries and workplaces should have access to both flexibility and essential worker rights.”

Workers and employers alike are urged to check out the DOL website to learn more about the new rule, which was published in the Federal Register on Jan. 10 and has an effective date of March 11.