In January 2024, the U.S. Department of Labor (DOL) issued its final rule on classifying workers as employees or independent contractors under the Fair Labor Standards Act (FLSA). The new rule is set to go into effect on March 11, 2024.
The distinction between employees and independent contractors determines whether the FLSA, which sets federal rules for minimum wages and overtime, applies or not. The misclassification of employees as independent contractors may result in claims for minimum wage, overtime pay, and other damages and penalties. The FLSA notably does not define “independent contractor,” so it has been up to the courts and the DOL to provide guidance on this question.
The new independent contractor rule is meant to be consistent with the multifactor analysis used by federal courts for decades. The new multifactor test takes a totality-of-the-circumstances analysis without assigning a predetermined weight to any of the factors or set of factors. These factors are based on the “economic reality” of a relationship between a worker and a potential employer. As the final rule states, “the ultimate question is whether as matter of economic reality the worker is in business for themself or is economically dependent on the potential employer for work.”
The “economic reality” factors include:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the potential employer;
- The degree of permanence of the work relationship;
- The nature and degree of control;
- The extent to which the work performed is an integral part of to the potential employer’s business; and
- The worker’s skill and initiative.
In addition to the economic reality factors listed above, additional factors may be relevant if they indicate in some way whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.
The new rule rescinds the DOL’s January 7, 2021, “core factors” rule and differs from its October 13, 2022, proposed rule. The key changes from the DOL’s 2022 proposed rule include the following updates and clarifications:
- The term “employer” is changed to “potential employer” throughout;
- “Opportunities” based on managerial skill is defined to include “initiative or business acumen or judgement;”
- The term “investments” focuses on the types of and not exclusively on the size of investments made by the worker and potential employer;
- The “degree of permanence” factor considers the temporal duration of the relationship and is not entirely dependent upon the non-exclusivity of the worker’s commitment to the potential employer;
- The “degree of control” factor will consider actions that are taken by a potential employer for purposes of compliance with laws and regulations not as evidence of control unless it serves “the potential employer’s own compliance methods, safety, quality control, or contractual or customer service standards;”
- “Integral part of the business” is defined as performing work “critical, necessary, or central” to the potential employer’s business; and
- The “skill and initiative” factor focuses on the use of the worker’s specialized skills in connection with business-like initiative as both employees and independent contractors may be skilled workers.
In the final rule, “the nature and degree of control” factor is further broken down to include several considerations in assessing common aspects of control including scheduling, supervision, setting a price or rate for goods or services, and the ability to work for others, although it is not meant to be considered an exhaustive list. The DOL also emphasized in the final rule that it has not adopted the “ABC test” used in states such as California, which uses a different framework and is argued to result in more workers being found to be employees instead of independent contractors.
Legal challenges to the new rule are likely. Immediately after the release of the new final rule, U.S. Senator Bill Cassidy, M.D. (R-LA), the ranking member of the Senate Health, Education, Labor and Pensions Committee, announced that he will introduce a Congressional Review Act to attempt to repeal the rule.
In the meantime, employers should evaluate their existing and future employment relationships and independent contractor agreements and consult with legal counsel to make changes as needed. There are also state independent contractor rules and regulations that may apply in certain situations.
If you have questions about the new independent contractor rule and its application, please contact FMJ’s HR & Employment Law Practice Group, including Shannon McDonough, Natolie Hochhausen, or John Ella. FMJ attorneys are available to help review your current policies and procedures, determine which independent contract rules apply for your organization, and develop strategies to comply with any relevant rules and regulations.
Related Attorneys
