What You Need To Know

• Employers should review worker classifications in light of the new Department of Labor rule that redefines which workers can be classified as independent contractors.
• Companies that rely heavily on independent contractors may want to conduct worker-classification audits under the new framework, along with any state-specific rules, such as California’s ABC test.
• The new rule goes into effect March 11, though it is already facing legal challenges and may be modified.

On January 10, 2024, the U.S. Department of Labor released its final rule for determining worker classification under the Fair Labor Standards Act (“FLSA”). The final rule returns to the economic reality test historically applied by courts that focuses on whether each factor shows the worker is economically dependent upon the employer. The guidance provided by the final rule aligns with longstanding judicial precedent on which employers have previously relied to determine a worker’s status.

The final rule sets forth a six-factor test for determining independent contractor classification under the FLSA:

• Opportunity for profit or loss depending on managerial skill: This factor focuses on whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work. While simply choosing to work more hours does not satisfy the test, activities like producing one’s own advertising, negotiating contracts, and deciding which jobs to perform and when to perform them would satisfy the test.
• Investment by the worker and the employer: This factor evaluates whether the worker’s investment is capital or entrepreneurial in nature to indicate independent contractor status. Costs borne by the worker to perform their job, such as tools, equipment and the worker’s labor, are not evidence of a capital or entrepreneurial investment, but activities like paying rent and paying for marketing services are.
• Degree of permanence of the work relationship: This factor analyzes whether the work relationship is definite or indefinite in duration. Relationships that are definite or sporadic indicate independent contractor status, while relationships that are indefinite or continuous indicate employee status.
• Nature and degree of control: This factor assesses whether the employer or the worker has substantial control over key aspects of performing the work, including scheduling, supervising, and the ability to work for others.
• Whether work performed is an integral part of the employer’s business: This factor considers whether the work performed is critical, necessary or central to the company’s principal business. If so, that indicates the worker is an employee.
• Skill and initiative: This factor examines whether a worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative that is consistent with the worker being in business for themself instead of being economically dependent on the business.

The final rule is set to go into effect on March 11, 2024, although it is already facing legal challenges and may be modified. Importantly, the rule does not affect applicable state laws governing independent contractor classification, such as California’s ABC test (as we reported on here), which may be more difficult to satisfy.

We recommend employers review their worker classifications in light of the new rule. Employers that are heavily reliant on independent contractors should consider conducting a worker-classification audit using the framework provided in the final rule along with any state-specific considerations.