On January 10, 2024, the Department of Labor (DOL) published its final rule[1] on employee or independent contractor classification under the Fair Labor Standards Act (FLSA), which is scheduled to go into effect on March 11, 2024. This article aims to provide guidance on the rule change and its impact.

Background

The FLSA is a federal piece of legislation that establishes minimum wage, overtime pay, record keeping, and child labor standards. The FLSA only covers employees, not independent contractors. Thus, the FLSA confers additional protections on employees. However, the FLSA itself does not provide guidance on distinguishing between an employee and an independent contractor.[2] As a result, courts established varying standards, with most focusing on the “economic reality” of the relationship between the employer and the individual. The varying standards led to unpredictable outcomes.

In 2021, the DOL sought to resolve this tension by publishing the first formal independent contractor rule (“2021 Rule”). The 2021 Rule was supposed to go into effect on March 8, 2021. However, the DOL delayed the effective date of the 2021 Rule. On May 6, 2021, the DOL attempted to withdraw the 2021 Rule. The 2021 Rule was also subjected to multiple court challenges.

Final 2024 Rule

In 2024, the DOL published its final independent contractor rule (“2024 Rule”). The 2024 Rule rescinds the 2021 Rule and replaces it with a six-factor test to distinguish between an employee and an independent contractor for purposes of the FLSA.

The six-factors outlined by the final rule are: (1) the worker’s opportunity for profit or loss; (2) investments by the parties; (3) the degree of permanence in the workplace relationship; (4) the nature and degree of control over the work; (5) whether the work is an integral part of the employer’s business; and (6) the worker’s skill and initiative.

The final rule returns to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity. Additionally, the rule emphasizes that the enumerated factors are not exhaustive.

The final rule also reiterates that “economic dependence is the ultimate inquiry for determining whether a worker is an independent contractor or employee.”[3] An employee is someone who is economically dependent on an employer for work – not income.[4] For example, a worker who is in business for themselves is not dependent on an employer for work – and thus is an independent contractor. In contrast, a worker who performs substantially all their work for one business is likely economically dependent on that business – and thus is an employee.

Differences from the 2021 Rule

The 2021 Rule included two core-factors: (1) nature and degree of control and (2) the worker’s opportunity for profit or loss. The 2024 Rule assigns equal weight to all the factors.

The 2021 Rule also constrained the additional factors by listing the non-core factors: (3) amount of skill required for work; (4) the degree of permanence of the working relationship; and (5) whether the work is part of an integrated unit of production. The 2024 Rule, in contrast, emphasizes the factors are not exhaustive.

Lastly, the final rule removes the prior prohibition against considering the centrality or importance of the work to the potential employer’s business.

Takeaways

• Remember, the law presumes every worker is an employee and the employer has the burden of overcoming that presumption to classify a worker as an independent contractor.
• The 2024 Rule clarifies it only applies to FLSA and does not impact classifications under other statutes such as the Internal Revenue Code, National Labor Relations Act, Title VII, or common law.
• The final rule may result in more workers, including those desiring independent contractor status, being classified as employees under the FLSA.
• The increased number of factors and absence of a controlling factor may lead to greater ambiguity and variability in determining worker status, potentially increasing litigation and providing the DOL with more enforcement discretion.

[1] See “Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act, RIN 1235-AA43,” Department of Labor, Wage and Hour Division.

[2] 29 U.S.C. § 203(e) defines an “employee” as “an individual employed by an employer.”

[3] See “Employee or Independent Contractor Classification Under the Fair Labor Standards Act,” Federal Register, a Rule by the Wage and Hour Division.

[4] Id.