New test for OT eligibility rife with land mines for employers

The U.S. Department of Labor is changing its rule for determining whether a worker is an independent contractor or an employee, potentially resulting in hundreds of thousands of dollars in penalties for an employer caught asleep at the wheel.

The new rule, which goes into effect on March 11, uses a six-factor balancing test to determine a worker’s status. It will replace the current rule emphasizing two core factors: control over the work performed and the worker’s opportunity for profit or loss.

An employer that misclassifies a worker often fails to pay overtime, which can result in an order for repayment and hefty damages. Misclassification resulted in at least seven of the DOL’s two dozen failure-to-pay-overtime enforcement actions totaling $8 million in the first three weeks of this month, DOL records show.

For example, on Feb. 2 the U.S. District Court for the Eastern District of Michigan entered a $181,531 consent judgment against Reliance Staffing. The DOL alleged the company misclassified its employees as independent contractors, depriving 70 nurses and assistants of $90,765 in overtime.

Classification may get more confusing for employers. When the new independent contractor test kicks in next month, it will be the third version since 2020, noted Todd Lebowitz, a partner at Baker & Hostetler in Cleveland.

“The final rule reflects a policy decision by the current DOL to crack down on what it perceives as excessive misclassification of independent contractors. The DOL has undertaken many enforcement actions in the past few years, and it issues press releases to celebrate its victories and to publicize settlements,” Lebowitz warned in a client advisory on the rule change.

Lebowitz told Law.com that many of the factors in the new test look similar to those courts are using already. For example, the “degree of permanence of the work relationship” factor is not unfamiliar to employers weighing whether work is infinite in duration or project-based.

“The devil is in the details,” Lebowitz said. “The DOL test would make it harder to satisfy the various factors, essentially putting their thumb on the scale to encourage a finding of employment.”

For instance, a factor of the test determining “nature and degree of control” considers the potential employer’s control over performance of the work and economic aspects of the working relationship, things such as whether the employer would set the worker’s schedule or supervise performance of the work.

“Sometimes control is also exerted to ensure compliance with a legal requirement or to ensure worker safety. Historically, when control is exerted to comply with the law, that’s not been deemed ‘relevant control,’” Lebowitz said.

The new DOL rule takes a step backward from this traditional view, he added.

“The DOL says that if an employer exerts control that is aimed toward compliance but in any way goes beyond what the law strictly requires, that can now be considered as evidence of control. The DOL’s position is not realistic,” he said, noting that many businesses have health and safety programs that go beyond minimum legal requirements.

Employers who expect contractors to follow site safety policies “now have to worry that the DOL would consider that to be evidence of an employment relationship,” Lebowitz added.

He recommends that businesses review their independent contractor agreements and consider redrafting sections that impose contractual requirements that are based on legal requirements.

This revised test for independent contractor status isn’t the only determination employers need be concerned about. Determining whether an employee is exempt from overtime, such as certain highly paid executives or administrators, remains tricky.

The “executive, administrative or professional,” or EAP, exemption generally covers those salaried workers paid at least $684 per week, or $35,568 annually. The DOL has proposed raising that to $1,059 per week, or $55,068 annually, but so far that proposal is in limbo.

But there are numerous other requirements. For example, to meet the executive job duties test, the employee must manage a team or department, supervise at least two employees and have hiring/firing authority.

As such, “ do not rely on job titles alone,” said Paul Piccigallo, a shareholder at Littler Mendelson in New York

Related: DOL’s new overtime rule may face legal challenges: Should employers wait and see?

Piccigallo also recommends that employers periodically review the status of such exempt employees. After a round of job cuts, that employee may no longer supervise two or more employees and no longer meet the test.

He also noted that some states, such as New York, have their own salary thresholds for exempt employees, and have recently updated those salary amounts.

The price of noncompliance can be devastating. For example, in 2020 the DOL filed suit against Clifton, New Jersey-based Ernie’s Auto Detailing, which provided auto cleaning and valet services to 140 dealerships in the Northeast.

The Labor Department alleged that the company failed to maintain accurate accounting of hours for the company’s 1,500 employees. Many worked well in excess of 40 hours per week but were not paid overtime.

Ernie’s filed for Chapter 11 bankruptcy in 2021, but the DOL persisted. Last December, the U.S. District Court for the District of New Jersey granted a $16.5 million default judgment against the company, with about half of that amount for unpaid overtime and the remainder in penalties.