This article was originally published on Jan. 9, 2024 and updated on Jan. 10 to include a link to the DOL's final rule.
On Jan. 9, 2024, the U.S. Department of Labor (DOL) announced the upcoming publication of its final rule on how to analyze whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). This is a long-awaited development after the DOL issued its proposed rule in Oct. 2022. On Jan. 10, the DOL published its final rule in the Federal Register, which can be accessed at this link.
Under the previous rule, the “employee versus independent contractor” analysis was focused on two “core factors”—the company’s degree of control over the work, and the worker’s opportunity for profit or loss. If both factors weighed in favor of a particular classification, the analysis essentially stopped there. Other factors were relevant only if the two core factors didn’t weigh in favor of a clear classification.
The new rule is aimed at expanding protections under the FLSA to more workers and reducing misclassification of independent contractors. Under the FLSA, these protections include things like minimum wage, overtime pay, and other protections. A finding by the DOL or a court that an employee has been misclassified as a contractor can be costly for the employer and result in the required payment of “back pay” (additional wages owed for time worked), liquidated damages, and other penalties, as well as potential tax liability.
The new rule identifies six factors for the determination of whether an individual is an employee or an independent contractor under the FLSA:
- opportunity for profit or loss depending on managerial skill (including sub-factors such as the worker’s ability to meaningfully negotiate the charge or pay for the work provided; the worker’s ability to accept, decline, and prioritize jobs; the worker’s marketing and advertising efforts; and the worker’s provision of other workers, materials, equipment, and space)
- investments by the worker and the potential employer (including whether the worker’s investments are similar to those of the potential employer, such as capital or entrepreneurial investments like equipment or labor costs);
- degree of permanence of the work relationship (including whether the relationship is indefinite, continuous, or exclusive versus definite, non-exclusive, project-based, or sporadic);
- nature and degree of control (including whether the worker has control over scheduling, supervision, price-setting, and the ability to work for others);
- extent to which the work performed is an integral part of the potential employer’s business (including whether the work is critical, necessary, or central to the potential employer’s business); and
- skill and initiative (including whether the worker uses specialized skills and whether those skills support a business-like initiative, or whether the worker is dependent on training from the potential employer).
This analysis uses a totality-of-the-circumstances “economic reality” test, under which no factor or set of factors holds more weight than the others. Additionally, other factors may be relevant in some circumstances to determine whether the worker is in business for themselves versus being economically dependent on the employer.
The new rule is effective March 11, 2024. In preparation for the effective date, employers should revisit their classification of contract labor to determine whether any changes need to be made before the new rule’s effective date.
Employers can access the text of the final rule here.
Brooks Pierce employment attorneys regularly assist employers with employee and independent contractor classification under the FLSA, including DOL Wage & Hour Division investigations. For assistance on any of these issues, please contact a member of our Labor & Employment Team.