By Melanie M. Ghaw, Esq. and Rachel H. Khedouri, Esq.
On January 9, 2024, the U.S. Department of Labor (“DOL”) issued its long-awaited final rule (the “Final Rule”) to provide guidance for employers on classifying workers as either “independent contractors” or “employees,” the latter of whom are subject to minimum wage and overtime requirements under the Fair Labor Standards Act (“FLSA”). Although largely consistent with the October 2022 proposed rule, the Final Rule – effective March 11, 2024 – provides clarification and adjustments in response to the more than 55,000 comments received by the DOL following publication of its proposal.
The Final Rule rescinds the Trump Administration’s 2021 rule, which focused on two “core factors” – (1) the nature and degree of control over the work, and (2) the worker’s opportunity for profit or loss – and returns to a more stringent economic reality test consistent with longstanding judicial precedent and the DOL’s pre-2021 guidance.
Under the Final Rule, the DOL will analyze each of six factors in light of the totality of the circumstances – no single factor is dispositive or has a predetermined weight. The six factors to be considered to determine whether a worker is an independent contractor are:
1. Opportunity for profit or loss depending on managerial skill.
- The DOL will evaluate whether the worker has opportunities for profit or loss based on their own managerial skill, including initiative or business acumen/judgment, that affect their economic success or failure in performing the work; the presence of such opportunities indicates the worker is an independent contractor. Considerations may include:
- Whether the worker can determine or negotiate pay;
- Whether the worker can choose the jobs, order, and time in which work is performed;
- Whether the worker engages in marketing or advertising efforts to expand and promote their business;
- Whether the worker makes hiring decisions; and
- Whether the worker purchases material and equipment or rents space.
2. Investments by the worker and the potential employer.
- Workers whose investments are capital or entrepreneurial in nature are more likely to be considered independent contractors to whom federal wage and hour laws do not apply. For example:
- Costs of tools and equipment, labor, and other costs that a potential employer unilaterally imposes on a worker are not capital or entrepreneurial in nature and indicate employee status.
- Investments that support an independent business and serve a business-like function, such as increasing the worker’s ability to perform more or different types of work, reducing costs, or extending market reach, are capital or entrepreneurial in nature and indicate independent contractor status.
3. The degree of permanence of the work relationship.
- A work relationship that is indefinite in duration, continuous, or exclusive weighs in favor of employee status. In contrast, a work relationship that is definite in duration, non-exclusive, project-based, or sporadic due to the worker’s independent business initiatives weighs in favor of independent contractor status.
4. The nature and degree of control.
- The DOL will consider a potential employer’s control, and reserved control, over work performance and economic aspects of the working relationship. The more control that is reserved or executed by the employer, the more likely the worker will be considered an employee. Facts to consider in determining the extent of control include:
- Whether the potential employer sets the work schedule, supervises performance, or limits the worker’s ability to work for others;
- Whether the potential employer uses technology to supervise performance or reserves the right to supervise or discipline workers; and
- Whether the potential employer controls the pricing and marketing for the worker’s services.
- Notably, a potential employer’s actions taken for the sole purpose of complying with a specific federal, state, or local law is not indicative of control; however, actions taken to serve the potential employer’s own compliance methods, safety, quality control, or contractual or customer service standards may be indicative of control.
5. The extent to which the work performed is an integral part of the potential employer’s business.
- Work that is “critical, necessary, or central” to the potential employer’s principal business will be considered by the DOL to weigh in favor of employee status.
6. Skill and initiative.
- A worker who uses specialized skills to perform the work and whose skills contribute to business-like initiative is more likely to be an independent contractor, whereas a worker who does not use specialized skills or is dependent on the potential employer for training to perform the work is likely to be an employee.
Although the six-factor economic reality test serves as a guide to conduct the totality-of-the-circumstances analysis, economic dependence is the ultimate inquiry – that is, a worker is an independent contractor under the FLSA if, as a matter of economic reality, the worker is in business for themselves rather than economically dependent on the employer.
The DOL has made clear that the Final Rule has no effect on other federal, state, or local laws that use different standards for employee classification. It also has no effect on state wage-and-hour laws which use an “ABC” or similar test, such as California or New Jersey. The FLSA does not preempt any other laws that protect workers; businesses must comply with all applicable federal, state, and local laws and ensure they meet whichever standard provides workers with the greatest protection.
Before the Final Rule’s effective date, employers should:
- Train appropriate personnel to ensure effective application of the six-factor test;
- Evaluate and audit current work relationships to ensure workers are properly classified under all applicable tests; and
- Review contracts, policies, and procedures used in engaging independent contractors and consider any necessary revisions.