The recent U.S. Department of Labor (DOL) rule under the Fair Labor Standards Act broadens the compensation range for employees eligible for overtime pay.  For employers, the new rule could affect profitability.

There are two approaches you might be considering to keep employees from falling under the latest rule.

The first approach is to reclassify employees from lower wage salaried employees to the overtime exempt categories of bona fide executive, administrative or professional (EAP) employees. If this change is truly warranted and justified, employees aren’t likely to be subject to the overtime provisions of the latest FLSA rule.

Before taking this step, speak with your legal, tax and human resources experts to avoid breaking any laws or other rules.

The second approach — one fraught with risk — is to reclassify employees as independent contractors.

The DOL, through its wage and hour division, published a rule in January providing guidance on how to analyze whether a worker is an employee or independent contractor. For additional information, visit the website located at https://www.federalregister.gov/documents/2024/01/10/2024-00067/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act.

According to this rule, the term independent contractor refers to workers who, as a matter of economic reality, aren’t economically dependent on an employer for work and are in business for themselves. Unless there’s been a significant change in the scope of someone’s employment, reclassifying that person as an independent contractor is hard to justify and document. You must be able to demonstrate whether, as a matter of economic reality, the worker is economically dependent on the employer for work and is therefore an employee or operates a business and is therefore an independent contractor.

The DOL website at https://www.dol.gov provides a clear, simple summary of independent contractor versus employee.

The DOL uses six economic reality test factors:

Opportunity for profit or loss depending on managerial skill. This factor looks at whether workers earn profits or suffer losses through their efforts and decision making. Relevant facts include whether the worker negotiates pay, decides to accept or decline work, hires workers, purchases material and equipment or engages in other efforts to expand a business or secure more work — marketing or advertising, for example.

Investments by the worker and employer. This factor looks at whether the worker makes investments that are capital or entrepreneurial in nature. Investments by a worker that support the growth of a business — increasing the number of clients, reducing costs, extending market reach or increasing sales — weigh in favor of independent contractor status.

Degree of permanence of the work relationship. This factor looks at the nature and length of the work relationship. Work that’s sporadic or project-based with a fixed ending date — or regularly occurring fixed periods of work — where the worker may make a business decision to take on multiple different jobs indicates independent contractor status. Work that’s continuous, doesn’t have a fixed ending date or could be the worker’s only work relationship indicates employee status.

Nature and degree of control. This factor looks at the level of control the potential employer has over the performance of the work and economic aspects of the working relationship. Relevant facts include whether the potential employer: controls hiring, firing, scheduling, prices or pay rates; supervises the performance of the work — including using technological means; has the right to supervise or discipline workers; and takes actions that limit the worker’s ability to work for others.

Extent to which the work performed is an integral part of the employer’s business. This factor looks at whether the work is critical, necessary or central to the potential employer’s principal business, which indicates employee status.

Skill and initiative. This factor looks at whether workers uses their specialized skills together with business planning and other efforts to perform the work and support or grow businesses. The fact a worker doesn’t use specialized skills — the worker relies on the employer to provide training for the job, for example — indicates the worker is an employee.

Misclassifying employees as either EAP employees or independent contractors can have dire tax, legal and other implications for your business.

Always consult the appropriate tax, legal and other professional advisors when making these classification decisions.