On January 10, 2024, the U.S. Department of Labor (DOL) published a Final Rule in the Federal Register, which rescinds and replaces the DOL’s 2021 independent contractor test. The Final Rule addresses how to determine whether a worker is properly classified as an independent contractor or an employee under the Fair Labor Standards Act (FLSA).
Employers should be aware that the DOL’s new independent contractor test may make it more difficult for employers to classify workers as independent contractors, which could result in findings of misclassification leading to backpay liability, liquidated damages, and awards of attorney fees. In particular, the DOL’s new independent contractor test will significantly impact the gig economy and employers who engage freelance workers and consultants.
Independent contractors are individuals who, as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves. Under the FLSA, employers are required to pay nonexempt employees the federal minimum wage as well as time and a half for every hour worked over 40 hours in a workweek. Notably, independent contractors are not covered by the FLSA’s minimum wage and overtime pay requirements.
The DOL and reviewing courts historically have relied upon an “economic realities” test to evaluate independent contractor status under the FLSA. Broadly, pursuant to the economic realities test, if the economic realities of a working relationship indicate that a worker is economically dependent on an employer for work, then the worker is considered an employee. However, if the worker is in business for him or herself, then the worker is considered an independent contractor.
In recent years, the FLSA’s independent contractor test has been in flux. The 2024 Final Rule rescinds the Trump Administration’s 2021 test, which was more business-friendly and made it easier for employers to classify workers as independent contractors. The 2021 test included five factors, but it assigned greater weight to two “core factors" – the nature and degree of control over the work and the opportunity for profit and loss. If both of the “core factors” pointed towards the same classification, then there was a substantial likelihood that the classification was the proper classification. In October 2022, the DOL published a proposed independent contractor rule that was intended to
rescind and replace the 2021 rule. The 2022 proposed rule included a six-factor “totality of the circumstances” analysis and invited public input prior to the issuance of a Final Rule.
The 2024 Final Rule, which will be codified as 29 C.F.R. Part 795, strongly resembles the 2022 proposed rule. The DOL maintains that the Final Rule is more consistent with judicial precedent and the FLSA’s text purpose since the Final Rule returns to the “totality of the circumstances” approach of the economic realities analysis. Rather than emphasizing certain “core factors,” the Final Rule lists six non-exhaustive factors for assessing whether a worker is an independent contractor under the FLSA:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the potential employer;
- Degree of permanence of the work relationship;
- Nature and degree of control;
- Extent to which the work performed is integral to the employer’s business; and
- The worker’s skill and initiative.
Significantly, none of the factors have a predetermined weight. Additional factors may also be considered in a given case; however, the DOL did not suggest what those factors may be.
While the 2024 Final Rule mirrors the 2022 proposed rule, the rule was modified in a few significant ways.
For example, the Final Rule changes factor two, relative investment. The proposed rule indicated that the DOL would compare the investments of the worker to the employer’s investments on a dollar-for-dollar basis. If an employer invested more money, then the worker was likely an employee under the 2022 proposed rule. Under the Final Rule, the DOL will not compare the worker and the employer’s investments on a dollar-for-dollar basis. Instead, it will examine relative investments to determine whether the worker is making “similar types of investments” that suggest that the worker is operating independently.
Additionally, the Final Rule modifies factor four – the nature of degree and control. Unlike the proposed rule, the Final Rule states that an employer’s exercise of control in order to comply with federal, state, or local laws will not automatically lend to a finding that a worker is an employee.
Likewise, the sixth factor – the worker’s skill and initiative – differs slightly from the proposed rule. The Final Rule no longer considers specialized skill by itself as indicative of an independent contractor relationship. What is relevant is whether the worker uses specialized skills in “connection with a business-like initiative.”
Notably, the Final Rule is limited to independent contractor status determinations under the FLSA. The standard does not apply to independent contractor status issues under other laws, such as the National Labor Relations Act, state workers’ compensation laws, and various tax laws, which each employ varying tests to determine independent contractor status. Thus, it is possible that an individual could be deemed an independent contractor under one law’s test, and an employee under that of another law.
Employers who rely on contract labor should be aware that the Final Rule is scheduled to take effect on March 11, 2024. Legal challenges to the Final Rule are anticipated, as the DOL’s decision to remove the more employer-friendly “core factor” analysis will likely receive pushback.
Calfee’s Labor and Employment attorneys are available to assist clients as to their use of independent contractors and applying the DOL’s Final Rule to the proper classification of workers under federal wage and hour law.
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