On January 10, 2024, the Wage and Hour Division of the United States Department of Labor (“DOL”) issued a new “Final Rule” addressing analysis for classifying workers as either independent contractors or employees under the federal Fair Labor Standards Act (“FLSA”). The Final Rule went into effect on March 11, 2024.
The Final Rule replaces prior guidance regarding the classification of workers published by the DOL in January 2021 (the “Former Rule”). In the Former Rule, the DOL departed from the longstanding “economic reality” test previously applied by courts and the DOL for determining proper independent contractor status. Instead of focusing on a totality of circumstances analysis, the Former Rule articulated five “economic reality factors” to be used in determining a worker’s status. These five factors consisted of two “core factors” to be given greater weight in the analysis—namely (a) the nature and degree of control over the work of the worker, and (b) the worker’s opportunity for profit or loss—and three non-core factors entitled to less weight in the analysis: (i) the amount of skill required for the work, (ii) the degree of permanence of the working relationship between the worker and the potential employer; and (iii) whether the work is part of an integrated unit of production.
The Final Rule: Return to the Economic Reality Test
The Final Rule rescinds the Former Rule and its reliance on “core factors,” focusing on a totality-of-the-circumstances analysis of the economic realities pertaining to the work performed by a worker in order to determine that worker’s proper classification as either an employee or independent contractor.
Under the economic reality analysis, no single factor is given a predetermined weight; instead, all factors are considered in view of the economic reality of the worker’s activities as a whole. Specifically, the test involves analysis of the following, expressly non-exhaustive factors:
- Opportunity for profit or loss depending on managerial skill – e., whether the work has opportunities for profit or loss based on managerial skills that affect the worker’s economic success or failure in performing the work. Potentially relevant facts include, among others, whether the worker can meaningfully negotiate, charge or pay for the work and whether the worker can accept or decline jobs or choose the order and/or time in which the jobs are performed.
- Investments by the worker and the potential employer – e., whether any investments by the worker are capital or entrepreneurial in nature. For example, investments that support an independent business and serve a business-like function, such as increasing the worker’s ability to perform different types or more work, reducing the worker’s costs, or extending the worker’s market reach are all indicative of independent contractor status.
- Degree of permanence of the work relationship – e., whether the work relationship is indefinite in duration, continuous, or exclusive of work for other employers. If the foregoing are true, this factor weighs in favor of a determination of employee status.
- Nature and degree of control – e., the potential employer’s control over the worker’s performance of his or her work. Potentially relevant facts include, among others, whether the potential employer supervises the performance of the work via technological means, reserves the right to supervise or discipline the worker, or places demands or restrictions on the worker that curtail the worker’s ability to work for others or work at the times of the worker’s own choosing.
- Extent to which the work performed is an integral part of the potential employer’s business – e., whether the function(s) performed by the worker are critical, necessary, or central to the potential employer’s principal business.
- Skill and Initiative – e., whether the worker utilizes specialized skills to perform his or her work, and whether those skills “contribute to business-like initiative.” Thus, where a worker does not use specialized skills, or where the worker is dependent on the potential employer’s training to perform the work, this factor weighs in favor of employee status. Note that a worker’s specialized skills themselves are not indicative of independent contractor status; instead, the relevant determination is whether the worker uses those specialized skills in connection with business-like initiative.
(See 29 C.F.R. § 795.110(b)(1)-(6).) The Final Rule also notes, as set forth in 29 C.F.R. §795.110(b)(7), that “[a]dditional factors may be relevant in determining whether the worker is an employee or independent contractor . . . if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.”
Conclusion
The correct determination of workers as independent contractors or employees carries significant legal ramifications. For instance, employees are entitled to a broader range of wage and hour protections under the FLSA and state labor laws than independent contractors. Additionally, employers face legal liability for misclassifying workers as independent contractors.
Employers should consider the impact of the Final Rule on their workforce classifications to ensure that they are properly classifying their workers. We have significant experience in counseling employers regarding their workforce classifications. If you have any questions or would like to discuss these issues further, please contact us.