DOL Proposed Regulations Address Worker Classification: 

Worker classification is a critical area of the law, in part because the Fair Labor Standards Act (“FLSA”) does not require employers to pay an independent contractor the minimum wage or overtime pay, or to keep records of an independent contractor’s activities. Also, as discussed below, this area of the law can have significant impacts on retirement plan compliance.

On February 27, the DOL issued proposed regulations that would rescind the 2024 independent contractor rule and its six-factor test. The proposed regulations would apply to the FLSA, as well as the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act.

Per the proposed regulations, an employer allows an individual to work as an employee if the individual is economically dependent on that employer for work. Conversely, an individual is an independent contractor if he or she is in business for himself or herself. This analysis depends on each situation’s specific facts and circumstances, and “no single factor is dispositive.” However, two core factors “are the most probative as to whether or not an individual is an economically dependent ‘‘employee’’…and each therefore typically carries greater weight in the analysis than any other factor.”

Under the first core factor:

• The conclusion that an individual is an independent contractor is supported to the extent the individual, as opposed to the potential employer, “exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer’s competitors.”
• On the other hand, this factor weighs in favor of an individual being an employee to the extent the potential employer “exercises substantial control over key aspects of the performance of the work, such as by controlling the individual’s schedule or workload and/or by directly or indirectly requiring the individual to work exclusively for the potential employer.”

Under the second core factor:

• Independent contractor status is supported to the extent the person “has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work.”
• Conversely, this factor weighs towards the individual being an employee to the extent he or she “is unable to affect his or her earnings or is only able to do so by working more hours or faster.”

Worker classification is a critical factor in administering many retirement plans. That is because, by law, independent contractors are not allowed to participate in most employer-sponsored retirement plans.

A compliance issue arises, along with potentially significant tax penalties, if (1) a worker is improperly classified as an independent contractor and thus improperly excluded from an employer’s plan; or (2) a worker is improperly classified as an employee and is improperly allowed to participate in an employer’s plan. Either issue requires correction as soon as possible after the issue is discovered.