The U.S. Department of Labor (DOL) issued its Final Rule regarding the test for independent contractor classification. The Final Rule, which becomes effective March 11, 2024, largely mirrors the DOL's proposed rule announced in 2022 and sets forth a multi-factor "totality of the circumstances" economic realities framework for analyzing whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA).
The new rule is more restrictive than the now rescinded 2021 Independent Contractor Rule, which focused on two core factors – the nature and degree of control over the worker and the worker's opportunity for profit or loss – with other factors as secondary considerations. Under the new rule, no single factor or group of factors is assigned any predetermined weight, and the DOL has signaled its renewed interest in analyzing the worker's investment in the work and whether the service being performed by the worker is an integral part of the employer's business.
Specifically, this new framework sets forth six non-exhaustive factors, with the weight given to each dependent on the facts and circumstances of the parties' relationship. Below is a brief summary of each factor:
- Opportunity for profit or loss depending on managerial skill. Does the worker have opportunities for profit or loss based on managerial skill that affect the worker's economic success or failure in performing the work? If a worker has no opportunity for profit or loss, then this factor suggests that the worker is an employee.
- Investments by the worker and the potential employer. Investments that are capital or entrepreneurial in nature indicate independent contractor status, such as 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 research.
- Degree of performance of the work relationship. When the work relationship is indefinite in duration, continuous, or exclusive of work for other employees, this factor weighs in favor of the worker being an employee. However, if the relationship is definite in duration, non-exclusive, project-based, or sporadic, this factor weighs in favor of an independent contractor relationship.
- Nature and degree of control. This factor considers the potential employer's control, including reserved control, over the performance of the work and the economic aspects of the working relationship, such as whether the potential employer sets the worker's schedule, supervises the performance of the work, reserves the right to discipline the worker, or restricts the worker's ability to work for others when they choose. More indicia of control by the potential employer favors employee status.
- Extent to which the work performed is an integral part of the potential employer's business. This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the potential employer's principal business.
- Skill and initiative. This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to the business-like initiative. When the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer, there is an indicia of employee status.
As a reminder, workers cannot voluntarily waive employee status under the FLSA and choose instead to be classified as an independent contractor. Workers who are not properly classified as independent contractors are "employees" for purposes of the FLSA and are subject to the FLSA's protections regarding minimum wage, overtime pay, and recordkeeping obligations. Employers are urged to review their worker classifications in light of this new guidance to ensure compliance with the FLSA and related wage and hour laws.
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