U.S. Department of Labor issues final rule that applies a "totality of circumstances" test

The Department of Labor (DOL) has issued its highly anticipated final rule addressing the classification of workers as independent contractors under the Fair Labor Standards Act (FLSA). This new rule, which takes effect on March 11, 2024, aligns with the long-standing economic realities test and aims to correctly classify workers as either independent contractors or employees entitled to wages and benefits and subject to various employment laws.

As we previewed in an October 2022 blog post, the new rule relies on a six-factor test to determine whether a worker is an employee or an independent contractor:

1. The worker's opportunity for profit or loss and exercise of managerial skill;
2. The relative investments made by the worker and the potential employer;
3. The degree of permanence of the work relationship;
4. The degree of control an employer has over the work;
5. The extent to which work performed is integral to the employer's business; and
6. The use of a worker's skill and initiative.

The rule emphasizes a balanced approach applying a "totality of the circumstances" test and clarifying that no single factor or subset of factors should be given more weight than others. This is a departure from the Trump-era independent contractor rule (now rescinded), which relied on similar factors, but placed greater weight on factor 1 (opportunity for profit and loss) and factor 4 (degree of control over the work).

Notwithstanding the "totality of circumstances" test using the six factors, the rule recognizes that some factors may be more probative than others depending on the circumstances (degrees of control, opportunity for profit or loss, investment, permanency, and skill). It also leaves open the possibility that the agency or courts may consider other unspecified factors that help answer the question of whether the worker is an independent business person or economically dependent on the employer for work.

What's Different From the 2022 Rule Proposal?

The final rule is very similar to the rule proposed in October 2022, but differs in a few subtle respects. For one example, the final rule clarifies that actions taken by potential employers for the sole purpose of complying with federal, state, tribal, or local laws or regulations do not indicate employer "control." The rule clarifies that enforcement of certain employer standards of conduct or standards of customer service may, however, indicate employer control. For another example, the final rule indicates that costs to workers that are unilaterally imposed by an employer are not capital or entrepreneurial "investments" that show an independently operating business.

Next Steps

Businesses that utilize independent contractors would be well advised to review and revise their independent contractor relationships in advance of the new rule's March 11, 2024, effective date. First, review those currently classified as independent contractors using the six-factor test and make any necessary adjustments to ensure proper classification. Second, review independent contractor agreements to ensure they clearly and properly outline the terms and conditions of the working relationship. Lastly, train supervisors and management-level employees involved in the retention or classification of independent contractors to ensure they comply with the terms of independent contractor agreements and maintain the proper level of control over individuals classified as independent contractors.

It is important to remember that in states that have adopted their own test to determine worker classification (like California, Massachusetts, and New Jersey), employers must comply with whichever law provides workers with the greatest protection. In addition, the rule does not apply to other federal laws with different independent contractor standards, e.g., the Internal Revenue Code or the National Labor Relations Act.

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