On January 9, the U.S. Department of Labor released its final rule on classifying workers as employees or independent contractors under the Fair Labor Standards Act. The final rule follows nearly three years of tortuous procedural history, including rescinding the 2021 independent contractor rule published in the last days of the Trump administration, the October 2022 proposed rule, and receipt of more than 55,000 comments from the public. The new final rule takes effect on March 11, 2024.

The final rule adopts a six-factor "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." The six factors are:

1. Opportunity for profit or loss depending on managerial skill

2. Investments by the worker and the potential employer

3. Degree of permanence of the work relationship

4. Nature and degree of control

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

6. Skill and initiative

No one factor is dispositive and "the weight to give each factor may depend on the facts and circumstances of the particular relationship." Additionally, the list of factors is not exhaustive, meaning that other facts can be considered.

The final rule expressly replaces the 2021 rule, which adopted a different version of the economic reality test that emphasized two "core factors" (nature and degree of control plus opportunity for profit and loss) that carried the most weight. Many view the new rule as more "employee-friendly" in that it could result in more workers being classified as employees, subject to the minimum wage and overtime protections of the FLSA. Companies who have significant numbers of contractors or consultants would be wise to evaluate those relationships to ensure compliance with the Labor Department's stricter approach to contractor classification.

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