Department of Labor Finalizes Independent Contractor Status Rule

On January 10, 2024, the U.S. Department of Labor (DOL) published a final rule,  returning to the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). Effective March 11, 2024, the new rule rescinds the January 2021 rule that has governed independent contractor designations since 2021.

What does the new rule establish?

Like the 2021 rule, the new rule focuses on “economic reality” to determine whether an individual is an employee under the FLSA. It establishes a new six-factor totality-of-the-circumstances test:

1. opportunity for profit or loss depending on managerial skill
2. investments by the worker and the potential employer
3. degree of permanence of the work relationship
4. nature and degree of control
5. extent to which the work performed is an integral part of the potential employer’s business
6. skill and initiative

No factor has a predetermined weight, and the new rule allows for the review of additional factors if they may show that workers are in business for themselves rather than economically dependent on employers.

What should employers know about the new rule?

The new rule intends to reduce instances of worker misclassification. It is broad in scope, which opens the door for additional workers to be considered employees under the FLSA, and therefore entitled to minimum wage and overtime. Employers should discuss employee classifications with counsel, perform audits of existing independent contractor agreements and pay structures, and plan for the future in terms of converting employees to or from independent contractors.

What does the new rule change?

In guidance released by the DOL, the new rule seeks to correct the old rule, which contained provisions that conflicted with longstanding case law and the DOL’s prior position on independent contractor status. These particular provisions included the designation of control and opportunity for profit or loss, which were given predetermined weight; consideration of a worker’s investments and initiative only with respect to the profit or loss consideration; and the overlooking of whether or not the work was central or important to the employer’s business. Overall, the old rule limited the economic reality test by excluding other relevant facts/factors that help determine whether workers are dependent on the employers (employees) or in business for their own personal gain (independent contractors).