Publications

Recent and upcoming changes to federal regulations and New York laws make this the ideal time and opportunity for employers to review – and possibly change – worker classifications.

Employers often suspect a certain percentage of employment-related misclassifications on their rosters – whether independent contractors who may be more appropriately classified as employees or employees whose positions have been designated as exempt but may actually hold non-exempt positions. Still, employers are often reluctant to analyze their workers’ classifications because of the challenges brought about by making such changes.

One of the most significant dilemmas is how to respond to a worker’s questions about why their classification is being changed, whether the worker has been misclassified until the present time, and perhaps most importantly, what benefits and additional compensation they may be owed, if any, based on any misclassification.

It is rare that employers have the opportunity to tell their workers about significant changes in the law that require a prospective change in their classifications. Employers would be well-served by taking advantage of this point in time by making their classifications compliant with applicable laws and regulations going forward.

Regarding independent contractors, the United States Department of Labor (“DOL”) issued a final rule on January 10, 2024, making it tougher to classify workers as independent contractors under the Federal Fair Labor Standards Act (“FLSA”). On the state level, New York passed the Freelance Isn’t Free Act, which did not change the standard for classification, but does provide more protections for independent contractors, including mandatory inclusion of certain terms in their written agreements, warranting review of independent contractor agreements.

Regarding exemption from overtime pay, the DOL has announced that it will issue its final rule this spring, which is expected to substantially increase the minimum salary level for exemption. Additionally, as of January 1, 2024, the minimum salary level for employees to be exempt from overtime in New York City, Long Island and Westchester has also increased. A discussion of each of these changes follows.

DOL INDEPENDENT CONTRACTOR REGULATIONS

The DOL recently issued a final rule for determining whether or not workers are independent contractors, which rescinded its 2021 Trump Administration rule. While the 2021 rule and the new rule both use the decades-old Economic Realities Test, the 2021 rule focused primarily on two “core factors,” with the new rule reverting to a “totality of the circumstances” analysis.

This new rule will be effective as of March 11, 2024. According to the DOL’s wage and hour division, the 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.” Because the new rule will make it harder for employers to classify workers as independent contractors, some workers may not be properly classified as independent contractors under the FLSA going forward.

The new rule includes the following six factors of the Economic Realities Test:

• a worker’s opportunity for profit or loss;

• the degree of permanence of the work relationship;

• the nature and degree of control over the performance of the work and working relationship;

• the skill and initiative of the worker;

• the investments by the worker and employer; and

• the extent to which the work performed is an integral part of the employer’s business.

Businesses often prefer to engage independent contractors rather than employees because independent contractors are not eligible for overtime pay, certain leaves of absence, and often are not entitled to certain other benefits that are typically only available to employees. Likewise, some workers prefer to be classified as independent contractors, most often because their compensation is not subject to the same taxes and withholdings as employees’ wages. It comes as no surprise that there are already two judicial challenges to the new rule: one by a coalition of businesses in the Fifth Circuit and another by a group of freelance writers and editors in Georgia.

Whether the challenges will be successful remains to be seen. Regardless of the outcome, the new rule presents a unique opportunity for employers to make prospective changes.

NEW REQUIREMENTS FOR INDEPENDENT CONTRACTOR AGREEMENTS IN NEW YORK STATE

After determining that a particular worker’s classification as an independent contractor is proper, businesses in New York State should make sure they have written agreements that include certain provisions, which will be required by New York Law.

The “Freelance Isn’t Free Act,” which establishes protections for certain freelance workers throughout New York State, takes effect on May 20, 2024. It largely replicates the existing protections of New York City’s “Freelance Isn’t Free” Law.

Under the New York State Act, a “freelance worker” is any person, or one-person organization, engaged as an independent contractor to provide services for at least $800 during the immediately preceding 120 days. Freelance workers do not include sales representatives, practicing attorneys, licensed medical professionals, or construction contractors; therefore, these workers are not protected by the Act.

Significantly, the Act establishes a right for freelance workers to have a written agreement with certain mandatory terms. All written agreements with freelance workers must include:

• the name and mailing address of both the hiring party and the freelance worker;
• an itemized inventory of all services to be provided by the freelance worker, the value of the freelance worker’s services, and the freelance worker’s fee;
• the payment date or mechanism by which such date will be determined; and
• the date by which the freelance worker must submit to the hiring party an itemized inventory to meet the hiring party’s internal deadlines for issuing the freelance worker’s fee.

The Act, among other freelance worker protections and rights, establishes a private right of action with statutory damages. As such, failure to comply with the Act can result in an investigation by the New York State Department of Labor, or costly litigation filed by the worker(s).

SALARY INCREASES FOR EXEMPT CLASSIFICATION

Following last year’s proposed FLSA exemption rule and the subsequent closing of the public comment period, the DOL anticipates publishing its final rule this spring. The FLSA exemption rule is expected to increase the minimum annual salary level for overtime pay exemptions from $35,568 to a minimum of $55,068 and possibly higher than $60,000. The DOL estimates that in the first year after the final rule is published, 3.4 million currently exempt workers will become non-exempt and entitled to overtime pay under the FLSA (unless the employees’ salaries are raised over the threshold).

Under New York State law, because the minimum wage has increased, so too has the minimum annual salary level to be classified as exempt from overtime. Specifically, in New York City, Westchester, and Long Island, the minimum salary increased to $62,400 as of January 1, 2024. In 2023, the minimum salary was $58,500. Employers with employees in New York City, Westchester and Long Island must, therefore, raise salaries to keep employees’ positions exempt or must pay overtime for all hours worked over 40 in any given workweek in order to comply with New York State wage and hour laws.

CONCLUSION

Significant changes to federal regulations and the laws of New York State have or will soon take effect. Employers will need to comply with these changes in order to maintain certain classifications of independent contractors and exempt employees, or they may face investigations or audits by governmental agencies, or perhaps be sued directly by workers for damages. Such a broad shift in the legal landscape of classifications presents a unique opportunity for employers to audit their workforces and possibly make changes without the typical associated scrutiny by the impacted workers.

For more information on the topic discussed, contact:

• Jason B. Klimpl  |  klimpl@thsh.com  |  212-508-7529
• Randi B. May  |  may@thsh.com  |  212-702-3167
• Elizabeth E. Schlissel  |  schlissel@thsh.com  |  212-508-6714
• Andrew W. Singer  |  singer@thsh.com  |  212-508-6723
• Stacey A. Usiak  |  usiak@thsh.com  |  212-702-3158
• Andrew P. Yacyshyn  |  yacyshyn@thsh.com  |  212-508-6792