The U.S. Department of Labor (“DOL”) announced a final rule revising its guidance on how to analyze whether a worker is properly classified as an employee or independent contractor under the Fair Labor Standards Act (“FLSA”).  The final rule rescinds the DOL’s 2021 independent contractor rule and takes effect on March 11, 2024.

The FLSA requires, among other things, covered employers to pay nonexempt employees at least the federal minimum wage for all hours worked and overtime pay for every hour worked over 40 in a workweek. These FLSA protections do not apply to independent contractors.  The FLSA does not define “independent contractor.”  The DOL is charged with enforcing the FLSA, and its final rule provides that an “independent contractor” is a worker who, as a matter of economic reality, is not economically dependent on the hiring party for work and is in business for themself.

The final rule sets out six factors that should be considered when analyzing the economic realities of the working relationship.  No factor or set of factors has a predetermined weight, and additional factors may be relevant if those additional factors in some way indicate whether the worker is in business for themselves. The final rule describes the six factors as follows: 

1. Opportunity for profit or loss depending on managerial skill.

This factor considers whether the worker has opportunities for profit or loss based on managerial skill (including initiative or business acumen or judgment) that affect the worker's economic success or failure in performing the work. The following facts, among others, can be relevant:

• whether the worker determines or can meaningfully negotiate the charge or pay for the work provided;
• whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed;
• whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and
• whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.

If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee. Some decisions by a worker that can affect the amount of pay that a worker receives, such as the decision to work more hours or take more jobs when paid a fixed rate per hour or per job, generally do not reflect the exercise of managerial skill indicating independent contractor status under this factor.

2. Investments by the worker and the potential employer.

This factor considers whether any investments by a worker are capital or entrepreneurial in nature. Costs to a worker of tools and equipment to perform a specific job, costs of workers’ labor, and costs that the potential employer imposes unilaterally on the worker, for example, are not evidence of capital or entrepreneurial investment and indicate employee status. Investments that are capital or entrepreneurial in nature and thus indicate independent contractor status generally support an independent business and serve a business-like function, such as increasing the worker's ability to do different types of or more work, reducing costs, or extending market reach. Additionally, the worker's investments should be considered on a relative basis with the potential employer's investments in its overall business. The worker’s investments do not have to be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of investments or the sizes of the worker and the potential employer. Instead, the focus should be on comparing the investments to determine whether the worker is making similar types of investments as the potential employer (even if on a smaller scale) to suggest that the worker is operating independently, which would indicate independent contractor status.

3. Degree of permanence of the work relationship.

This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration, continuous, or exclusive of work for other persons or entities. This factor weighs in favor of the worker being an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities. This may include regularly occurring fixed periods of work, although the seasonal or temporary nature of work by itself would not necessarily indicate independent contractor classification. Where a lack of permanence is due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ, this factor is not necessarily indicative of independent contractor status unless the worker is exercising their own independent business initiative.

4. Nature and degree of control.

This factor considers the hiring party’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship, with control being more typical of an employment relationship. Facts relevant to the hiring party’s control over the worker include whether the hiring party sets the worker's schedule, supervises the performance of the work, or explicitly limits the worker's ability to work for others. Additionally, facts relevant to the hiring party's control over the worker include whether the hiring party  uses technological means to supervise the performance of the work (such as by means of a device or electronically), reserves the right to supervise or discipline workers, or places demands or restrictions on workers that do not allow them to work for others or work when they choose. Whether the hiring party controls economic aspects of the working relationship should also be considered, including control over prices or rates for services and the marketing of the services or products provided by the worker. Actions taken by the hiring party for the sole purpose of complying with a specific, applicable federal, state, tribal, or local law or regulation are not indicative of control. As examples of such compliance actions that are not indicative of control, the final rule identifies a publication’s requirement that a writer comply with libel law and a home care agency’s requirement that all individuals with patient contact undergo background checks in compliance with a specific Medicaid regulation. Actions taken by the hiring party that go beyond compliance with a specific, applicable federal, state, tribal, or local law or regulation and instead serve the hiring party’s own compliance methods, safety, quality control, or contractual or customer service standards may be indicative of control. For example, a home care agency’s imposition of extensive provider qualifications, such as fulfilling comprehensive training requirements (beyond training required for relevant licenses), may be probative of control. More control by the hiring party favors employee status; more control by the worker favors independent contractor status.    

5. Extent to which the work performed is an integral part of the potential employer’s business.

This factor considers whether the work performed is an integral part of the hiring party’s business. This factor does not depend on whether any individual worker in particular is an integral part of the business, but rather whether the function they perform is an integral part of the business. This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the hiring party's principal business. This factor weighs in favor of the worker being an independent contractor when the work they perform is not critical, necessary, or central to the hiring party’s principal business.

6. Skill and initiative.

This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the hiring party to perform the work. Where the worker brings specialized skills to the work relationship, this fact is not itself indicative of independent contractor status because both employees and independent contractors may be skilled workers. It is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.

If an employee is incorrectly classified as an independent contractor, the employer is responsible for unpaid wages due under the FLSA, potential liquidated damages and attorneys’ fees associated with litigation.  Employers should take note of the final rule and take this as an opportunity to review their worker classifications and consult with their legal counsel on any questions about existing or potential contractor classifications.

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