On January 9, 2024 the Department of Labor (DOL) announced its final rule on the classification of workers as employees or independent contractors for purposes of the Fair Labor Standards Act (FLSA). Among other things, the FLSA requires employers to provide their non-exempt employees with minimum wage for all hours worked and overtime pay for all hours worked in a workweek in excess of forty, and requires employers to maintain various wage-and-hour and other records relating to their employees.
The final rule is an “economic reality” test that considers the totality of the circumstances when determining whether a worker is properly classified by a hiring entity as an independent contractor not entitled to the above-noted protections afforded to employees under the FLSA. A worker is an employee under this rule if the worker is, “as a matter of economic reality,” economically dependent on the hiring entity for work. In contrast, a worker is an independent contractor under this rule if the worker is, “as a matter of economic realty, in business for themself.” This analysis includes consideration of the following non-exhaustive factors, and no particular factor is assigned a predetermined weight:
(1) Opportunity for loss or profit depending on the worker’s managerial skill;
(2) Investments by the worker and the hiring entity;
(3) The degree of permanence of the work relationship;
(4) The nature and degree of the hiring entity’s control (including reserved control) over the performance of the work and the economic aspects of the working relationship;
(5) The extent to which the work performed is an integral part of the hiring entity’s business; and
(6) The worker’s initiative and skill.
The final rule becomes effective March 11, 2024, and rescinds a 2021 rule that the DOL says improperly limited the facts that may be considered when analyzing this issue and weighed certain factors more than others.
The classification of workers as independent contractors has been and will remain a hot topic, as independent contractors are not protected by most employment laws. As noted in our June 30, 2023 update on the classification of workers as independent contractors under the National Labor Relations Act (which you can access here), there are many other federal and state laws with their own independent contractor tests. Because the tests vary and the analysis can be complex, employers should seek guidance from counsel when analyzing whether their workers are properly classified as independent contractors and in preparing independent contractor and employment agreements and policies.