Key Points:

• In recent years wage-and-hour claims have led to costly settlements for restaurant, retail and hospitality employers.
• The Dept. of Labor’s final rule on independent contractor classification, rescinding many employer-friendly Trump-era changes, went into effect on March 11.
• The new rule restores an updated 6-factor analysis that makes it more difficult to classify workers as independent contractors.
• Employers that have not made the appropriate classification should contact counsel to limit or avoid penalties.

Employers in the Restaurant, Retail and Hospitality sectors must classify individuals they engage as either “employees” or “independent contractors.” The “employee” vs. “independent contractor” distinction is especially important because employees are entitled to minimum wage, overtime, income tax withholding, the employer portion of social security tax, unemployment insurance, and workers’ compensation coverage (and employer contributions), as well as the full range of employee benefits, such as paid vacations, sick time, 401k/retirement benefits and employment discrimination protection. Independent contractors, by contrast, are not so protected. Additionally, a mistaken misclassification may subject employers to costly penalties from the Department of Labor (“DOL”).

In recent years, wage-and-hour claims and related issues in retail, restaurants and hospitality have led to costly settlements for restaurant, retail and hospitality employers. For example, in 2017, Hersha Hospitality Group Management, LP, a hotel management company that supplied workers to nine of its New York City hotels, agreed to pay $550,000 in back wages and damages following a DOL investigation into violations of the Fair Labor Standards Act (“FLSA”), including misclassification of workers as independent contractors rather than employees. Similarly, in 2023, the DOL obtained a $650,000 consent judgment against Romero’s Food Products, Inc. for FLSA violations. In particular, the DOL investigation found that Romero’s had misclassified its delivery drivers as independent contractors and denied them overtime pay for hours worked in excess of 40 hours in a workweek.

On January 10, 2024, the DOL published its highly anticipated final rule on independent contractor classification in the Federal Register. Effective on March 11, 2024, the new rule provides several important clarifications concerning the DOL’s analysis of which all U.S. employers need to be aware. The new rule rolls back many of the Trump-era changes to the DOL’s analysis when determining employee or independent contractor status. Traditionally, the DOL and many federal courts would consider six factors when analyzing the independent contractor vs. employee status. In early 2021, the Trump administration reduced the number of factors to two. The new rule represents a return to a more “employee-friendly” six-factor analysis with several important modifications:

1. Opportunity for profit or loss depending on managerial skill. DOL will consider whether the worker has opportunities for profit or loss based on managerial skill (including initiative or business acumen or judgment) that affect the worker’s economic success or failure in performing the work.
2. Investments by the worker and the potential employer. This factor considers “whether any investments by a worker are capital or entrepreneurial in nature.” The final rule states, “Costs borne by a worker to perform their job,” such as “tools and equipment to perform specific jobs and the worker’s labor... are not evidence of capital or entrepreneurial investment and indicate employee status.” The final rule further states that investments that are capital or entrepreneurial in nature and thus indicative of independent contractor status are those that “generally support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach.”
3. Degree of permanence of the relationship. This factor considers whether the degree of permanence of the work relationship would “weigh[ ] in favor of the worker being an employee when the work relationship is indefinite in duration or continuous, which is often the case in exclusive working relationships,” and that this factor would “weigh[ ] in favor of the worker being an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities.”
4. Nature and degree of control. With respect to the degree of the potential employer’s “control” over the working relationship, the rule states that relevant factors include whether the employer sets a worker’s schedule, compels attendance, or directs or supervises the work.
5. Extent to which the work performed is an integral part of the potential employer’s business. This factor considers whether the work is “critical, necessary, or central to the employer’s principal business.”
6. Skill and initiative. This factor considers “whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative.” The DOL states, “This factor indicates employee status where the worker does not use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.”

The rule further stipulates, “Additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the employer for work.”

What Businesses Need to Do Now

To limit or avoid additional penalties, companies that did not assess their compliance with the new rule by the March 11, 2024 effective date should immediately contact labor and employment counsel to assist making the appropriate designation as to whether the individuals it engages are “employees” or “independent contractors,” as this affects important issues of employer taxation responsibility, benefit eligibility and employment discrimination coverage.

Conclusion

Please contact us if you or your business needs any assistance or information on the employee or independent contractor issue.