Department of Labor Addresses Contractor Classifications

Earlier this year, the Department of Labor (DOL) issued a final rule revising the analysis used to determine whether a worker should be classified as an “employee” or “independent contractor” under the Fair Labor Standards Act (FLSA). Workers considered “employees” under the FLSA are granted basic workplace protections, such as the right to minimum wage and overtime pay, whereas workers classified as “independent contractors” are not. By revising the analysis, DOL hopes to reduce the misclassification of employees as independent contractors and ensure that employees are receiving the protections/benefits they are entitled to. The final rule was scheduled to go into effect on March 11, 2024.

To determine whether a worker is an “employee” or “independent contractor” under the FLSA, the rule focuses on the “economic reality” of the worker’s relationship with a potential employer and whether the worker is “economically dependent” on that employer for work (“employee”) or in the business for themselves (“independent contractor”). The final rule relies on a “totality-of-the-circumstances analysis” of the economic reality of the worker’s relationship with the employer to determine economic dependence (and - subsequently - whether the worker is an “employee” or “independent contractor” under the FLSA). While the “totality-of-the-circumstances analysis” uses all available information about the working relationship to determine economic dependence, its assessment is guided by six factors:

Opportunity for Profit or Loss Depending on Managerial Skill

Whether the worker has opportunities for profit or loss based on managerial skill (including initiative or business acumen or judgment) that affect the worker's economic success or failure in performing the work.

Investments by the Worker and the Potential Employer

Whether any investments by a worker are capital or entrepreneurial in nature.

Degree of Permanence of the Work Relationship

Weighs in favor of the worker being an “employee” when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers; weighs in favor of the worker being an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for [themselves] and marketing their services or labor to multiple entities.

Nature and Degree of Control

Considers the potential employer's control, including reserved control, over the performance of the work and the economic aspects of the working relationship.

Integral Part of the Potential Employer’s Business

Weighs in favor of the worker being an “employee” when the work they perform is critical, necessary, or central to the potential employer's principal business; weighs in favor of the worker being an independent contractor when the work they perform is not critical, necessary, or central to the potential employer's principal business.

Skill and Initiative

Whether the worker uses specialized skills to perform the work and whether those skills contribute to the business-like initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work It is the worker's use of those specialized skills in connection with a business-like initiative that indicates that the worker is an independent contractor. It is important to note that these six factors are not exhaustive. Additionally, “economic dependence” is not focused on the amount of income the worker earns or if the worker has other sources of income.

This final rule replaces the “Independent Contractor Status Under the Fair Labor Standards Act” (2021 IC Rule), which assigned different weights to the economic reality factors it used to determine classification.

Specifically, (1) the nature and degree of control over the work and (2) the worker’s opportunity for profit or loss were designated as “core factors” under the 2021 IC Rule and carried more weight in the analysis. The 2021 IC Rule’s non-core factors were: (3) the amount of skill required for the work; (4) the degree of permanence of the working relationship between the worker and the potential employer; and (5) whether the work was part of an integrated unit of production.

According to the NPRM for the 2023 final rule, several provisions of the 2021 IC Rule were “in tension [with] decades of case law applying the economic reality test,” including:

• Designating two ‘core factors’ as most probative and predetermining that they carry greater weight in the analysis;
• Considering investment and initiative only in the opportunity for profit or loss factor; and
• Excluding consideration of whether the work performed is central or important to the employer's business.

The NPRM stated that these provisions “narrowed the economic reality test by limiting the facts that may be considered as part of the test” to determine economic dependence.

Any business operating with the use of independent contractors or employees that may satisfy some of the standards listed above should seek counsel on how to properly comply with the provisions of the new regulations.