The U.S. Department of Labor has published its final rule on how to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA).
The rule, which becomes effective on March 11, 2024, rescinds the 2021 independent contractor rule issued under the Trump administration, replacing it with a six-factor analysis that examines the “economic reality” of an employer-worker relationship.
At its core, the test considers whether the worker depends on the employer for continued employment or truly operates as their own independent business.
Despite the likelihood of legal challenges, impacted employers should consider the final rule as the controlling standard. Employers are advised to assess their existing workforce and practices, particularly those functions consistently outsourced to independent contractors, to identify potential risks and necessary changes.
Be aware that the new DOL rule does not directly impact ABC tests for worker classification in the states that use them (e.g., California, Massachusetts, and New Jersey).
Under the new rule, here are some key factors to consider:
1) The worker’s opportunity for profit or loss,
2) Financial stake or resources a worker has invested,
3) Degree of permanence,
4) Degree of control the employer has over the person’s work,
5) Whether the work is essential to the employer’s business, and
6) Worker skill and initiative.
Note that the DOL emphasizes that no single factor is determinative. The test involves a comprehensive evaluation of all relevant factors to determine the overall nature of a working relationship. As such, the DOL indicates that these factors are not exhaustive, meaning that other factors might be deemed relevant to a given case.
In reviewing the final rule as compared to the DOL’s proposed rule, issued in October 2022, analysts say that the core six-factor test has remained consistent, with some meaningful clarifications:
- Compliance versus control: Under the proposed rule, any control exercised by an employer, including legal compliance issues, would have tipped the scales toward an “employee” classification. Under the final rule, however, businesses can compel workers to comply with specific legal requirements, without affecting their classification status.
- Profit and loss: The proposed rule stipulated that a worker does not have an entrepreneurial opportunity for profit or loss when they can earn more money simply by taking on more jobs. The final rule clarified that, indicating that more work is not entrepreneurial opportunity when the worker “is paid a fixed rate per hour or per job.”
- Tools and equipment: The proposed rule indicated that a worker was not automatically an independent contractor just because they paid for their own tools or equipment needed to do the job. The final rule clarifies that this applies to costs that are “unilaterally imposed” by the employer. A worker who invests in tools on their own initiative is more likely to be considered an independent contractor.
Benefits, protections, and business models at stake
Classification under the FLSA affects a worker’s eligibility for benefits such as minimum wage, overtime pay, and other protections.
“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” said Acting Secretary of Labor Julie Sum, in a statement. “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.”
According to the DOL, the rule aligns with how the courts have historically interpreted the FLSA on worker classification, thereby providing greater consistency and predictability. However, critics argue that the opposite is more likely, and that the new rule will lead to a wave of litigation, particularly in the transportation and logistics industries.