On January 9, 2024, the U.S. Department of Labor “DOL” published a final rule on employee or independent contractor classification under the Fair Labor Standards Act “FLSA.” The final rule is set to take effect on March 11, 2024. The 2024 rule rescinds and replaces the Trump administration’s 2021 rule that took a more simplified approach to the worker classification analysis and returns to the “totality of the circumstances” standard.
The Economic Realities Test
- As the DOL explained, the 2024 rule adopts a six-factor test that utilizes an economic realities framework. To distinguish workers for the purposes of minimum wage and overtime pay under the FLSA, the six factors are:
- The opportunity for profit or loss based on managerial skill;
- Investments by the worker and the potential employer;
- The degree of permanence of the relationship;
- The nature and degree of control over performance of the work and working relationship;
- The extent to which the work performed is an integral part of the potential employer’s business; and
- The skill and initiative of the worker.
- By utilizing a totality-of-the-circumstances approach, employment classification status is not determined by a single factor. Nor, as the DOL further explained, are any of the six factors given a predetermined weight. Likewise, the six factors are not exhaustive and other factors may be relevant if the factors show whether a worker is an independent contractor or an employee under the FSLA.
Explanation of The Factors
- For factor one, there are several facts that can point to whether a worker has the opportunity for profit or loss based on managerial skill. For instance, a worker who: determines the charge for work performed; chooses which and when jobs are to be performed; advertises to secure him/herself more work; and purchases his/her own equipment, is more likely to satisfy factor one than a worker who has no opportunity for profit or loss.
- For factor two, investments by a worker that are capital or entrepreneurial in nature indicate independent contractor status. Importantly, the DOL states, “the worker’s investments should be considered on a relative basis with the potential employer’s investments in its overall business.” As well, when comparing relative investments, the focus is on their similarity. Thus, if the employer invests more capital than the worker, this factor would weigh in favor of employee status.
- For factor three, the test looks at facts such as duration of the work relationship. This factor weighs in favor of a worker being classified as an independent contractor if the worker has a work relationship that is specific in length, non-exclusive, project-based, or irregular due to the worker operating independently and selling their labor or services to other companies. This factor may not be indicative of independent contractor status if the “lack of permanence is due to operational characteristics that are unique or intrinsic to” your business or industry.
- For factor four, the focus is on a potential employer’s control over the performance of work. Facts that are relevant can be “whether the potential employer sets the worker’s schedule, supervises the performance of the work, or explicitly limits the worker’s ability to work for others.” In terms of supervision, an example can be if a potential employer digitally tracks a worker’s work product. In factor four, the DOL has explained that actions taken by a potential employer for the sole purpose of compliance is not “indicative of control.” For example, the drafters of the 2024 rule explain “a publication’s requirement that a writer comply with libel law” would be an action for the sole purpose of compliance.
- For factor five, the inquiry is whether the work performed is “an integral part of the potential employer’s business.” If a worker performs tasks or work that is central to the potential employer’s business, the factor will weigh in favor of an employee classification.
- For factor six, a worker can be classified as an employee if they do not utilize specialized skills to perform the work, or rely on training from the potential employer to perform the work. However, even when a worker brings specialized skills to a role, this fact is not dispositive of independent contractor status since many workers may be skilled in certain areas. Thus, the inquiry focuses on how those skills are used in connection with the previous factors.
What Else You Need to Know
- The 2024 rule may create compliance issues for organizations that rely on independent contractors as well as employees who provide on-demand work, services, or goods.
- Employers should assess their current and future relationships with employees and independent contractor agreements and make any necessary adjustments.
- If workers are misclassified as independent contractors, potential liability for employers includes back pay, unpaid taxes and other penalties.
