On January 9, 2024, the U.S. Department of Labor (“DOL”) announced the issuance of the final rule, Employee or Independent Contractor Classification under the Fair Labor Standards Act (“FLSA”). According to the DOL, the 339-page final rule and guidance will reduce the risk that employees are misclassified as independent contractors, applies to workers in any industry, and provides greater consistency for businesses to engage with individuals who are in business for themselves.

Under the final rule, the DOL will rely on the “economic reality” test, consistent with the long-standing multi-factor analysis used by courts, to determine whether, as a matter of economic reality, workers are in business for themselves, or economically dependent on the hiring party for work. The final rule applies six factors to analyze employee or independent contractor status 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 an integral part of the potential employer’s business; and
• skill and initiative.

The final rule provides extensive guidance and examples as to each factor. It is important to note that no single factor or set of factors has a predetermined weight or conclusively determines whether a worker is an employee or an independent contractor. Moreover, additional factors may be relevant if such factors indicate whether workers are in business for themselves as opposed to being economically dependent on the hiring party.

Reactions to the final rule have been mixed. Proponents believe that the final rule levels the playing field and is beneficial for the most vulnerable workers, those who are unfairly deprived of minimum wages, overtime pay, and other FLSA protections. Opponents indicate that the final rule makes the hiring party’s decision more difficult because of the uncertainty as to how much importance should be given to any of the six factors, resulting in a bias towards classifying workers as employees.

To avoid the legal risks and repercussions of misclassifying a worker’s status, employers should exercise caution and seek legal advice to ensure that all appropriate factors are considered. Failure to do so could result in the deprivation of a worker’s basic rights and protections, including, but not limited to, lost wages, employee benefits, unemployment insurance, workers’ compensation coverage, and tax implications.

The final rule only revises the DOL’s interpretation of the FLSA and has no effect on other state, federal, or local laws that use different standards for employee or independent contractor classification. The final rule does not carry as much weight as laws passed by Congress or state legislatures but replaces the 2021 DOL rule titled “Independent Contractor Status under the Fair Labor Standards Act” with an entirely new analysis more consistent with the FLSA and long-standing legal precedent. Therefore, hiring parties should be familiar with the final rule and its impact on particular workers/industries, utilize the DOL’s guidance to review classification policies and worker statuses, and seek legal counsel as needed.

The final rule becomes effective on March 11, 2024.