On January 10, 2024, the U.S. Department of Labor (“Department”) changed the test as to whether a worker is an employee or independent contractor under the Fair Labor Standards Act (“FLSA”). This final rule rescinds the Independent Contractor Status test from two years ago. The final rule, effective on March 11, 2024, did not adopt California’s “ABC” rule, but relies on a six-factor “economic reality” test. 

The Department’s final rule identifies a six-factor, totality-of-circumstances test to determine whether a worker is an employee or independent contractor: 

1. The opportunity for profit or loss depending on managerial skill;
2. Investments by the worker and potential employer;
3. The degree of permanence of the work relationship;
4. The nature and degree of control over performance of the work and working relationship;
5. The extent to which the work performed is an integral part of the potential employer’s business; and
6. 6The skill and initiative of the worker.

The new rule states that no single factor expressly carries more weight than another. However, the circumstances may lead to giving one factor more weight than other factors. In addition, the new rule also allows for the consideration of additional factors outside of the core six factors that may be relevant to the overall question of economic dependence. Simply put, no single factor should be dispositive. 

Employers must be mindful that simply labeling a relationship as an independent contractor does not, in fact, make a worker an independent contractor under the FLSA. The determination between an employee and independent contractor will be determined by the totality of the circumstances under Federal law. Employers of California workers need to continue to adhere to California’s ABC test, as the Department’s new rule does not supersede California’s wage and hour laws for California workers. Improper classification can lead to liability and penalties for the employer.