DOL Announces New Final Rule To Distinguish Between Employees and Independent Contractors

This week, the US Department of Labor (DOL) issued a final rule — Federal Register: Employee or Independent Contractor Classification Under the Fair Labor Standards Act — that provides new guidance on how to distinguish between employees and independent contractors under the Fair Labor Standards Act (FLSA) and rescinds the Department’s 2021 rule on the same subject.

Read an alert that discusses the 2021 rule here. Read the Department’s final rule here.

According to the Department, the new rule seeks to combat employee misclassification. “Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” explained Acting US Secretary of Labor Julie Su. “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.”

The rule employs an “economic reality test” to determine whether workers are economically dependent on the employer for work or, instead, are in business for themselves. That approach takes into account the “totality of the circumstances.” Six non-exhaustive factors, however, guide the analysis.

1. Opportunity for Profit or Loss Depending on Managerial Skill

This factor considers 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. If a worker has no opportunity for a profit or loss, this factor points toward employment. The following facts, among others, are germane to the analysis:

  • whether the worker determines or can meaningfully negotiate the charge or pay for the work provided;
  • whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; and
  • whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.

2. Investments by the Worker and the Potential Employer

This factor considers whether the worker makes capital or entrepreneurial investments in connection with the work. According to the Department, “Costs to a worker of tools and equipment to perform a specific job, costs of workers' labor, and costs that the potential employer imposes unilaterally on the worker, for example, are not evidence of capital or entrepreneurial investment and indicate employee status. Investments that are capital or entrepreneurial in nature and thus indicate independent contractor status generally support an independent business and serve a business-like function, such as increasing the worker's ability to do different types of or more work, reducing costs, or extending market reach.”

3. Degree of Permanence of the Work Relationship

Explains the Department: “This factor 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. This factor 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 themself and marketing their services or labor to multiple entities.”

4. Nature and Degree of Control

This factor considers the potential employer's control, including reserved control, over the performance of the work and the economic aspects of the working relationship. Relevant factors include:

  • whether the potential employer sets the worker's schedule, supervises the work performance, or explicitly limits the worker's ability to work for others;
  • whether the potential employer uses technology to supervise work performance, reserves the right to supervise or discipline workers, or places demands or restrictions on workers that do not allow them to work for others or work when they choose; and
  • whether the potential employer controls economic aspects of the working relationship, including control over prices or rates for services and the marketing of the services or products provided by the worker.

5. The Extent to Which the Work Performed is an Integral Part of the Potential Employer's Business

This inquiry focuses not on whether the worker, but rather whether the worker’s functions are integral to the business. Says the Department, “This factor 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. This factor 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.”

6. Skill and Initiative

This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. If the worker uses no specialized skills to perform the work or if the worker is dependent on training from the potential employer to perform it, this indicates employment. But, that a worker brings specialized skills to the relationship does not alone indicate independent contractor status; both employees and independent contractors may be skilled workers. It’s the worker's use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.

No one factor or subset of factors is dispositive, and, the weight to give each factor may depend on the facts and circumstances of each case.

Moreover, according to the Department, the six factors are not exhaustive. Rather, the new rule takes into account the “totality of the circumstances”, to determine whether a worker is in business for himself/herself or economically dependent on the potential employer.

Determining the distinction has significant practical import. Absent an exemption, if a worker is an employee, the FLSA requires that the company pay the individual no less than the federal minimum wage, pay time-and-a-half for all hours that the individual works beyond 40 in a workweek, and comply with the FLSA’s recordkeeping requirements for the individual.

The new rule is effective on March 11, 2024. Legal challenges, however, may delay its implementation.

If you have any questions about the DOL’s new rule, please contact the author, any other member of the Labor & Employment practice, or the ArentFox Schiff professional who regularly handles your matters.


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