On January 10, 2024, the United States Department of Labor released the Employee or Independent Contractor Classification Under the Fair Labor Standards Act Final Rule. The purpose and effect of the Final Rule is to revise the DOL’s guidance and standards for how to analyze and determine whether a particular worker is an employee or independent contractor under the Fair Labor Standards Act (“FLSA”). The FLSA does not define the distinction and courts were therefore required to create their own tests and standards. Most settled on determining the “economic reality” of the relationship, with different courts weighing different factors to reach that determination. In 2021, the DOL issued its previous guidance, but the new Final Rule replaces that guidance. The Final Rule took effect on March 11, 2024, and is very similar to the proposed rule, which was previously discussed in this article.

What are the key provisions of the USDOL’s 2024 New Rule?

The overarching question continues to be one of the “economic reality” of a particular working situation – if a worker is economically dependent upon an employer for work, then they are an employee and not an independent contractor. In order to determine that question, the Final Rule lists six criteria that should be considered without concentrating on any particular factor. Those six factors are:

1. The worker’s opportunity for profit or loss depending on managerial skill;
2. The investments by the worker and the potential employer;
3. The degree of permanence of the work relationship;
4. The nature and degree of control over the work;
5. The extent to which the work performed is an integral part of the potential employer’s business; and
6. The worker’s skill and initiative.

As noted above, no one factor is inherently more important than another, but the DOL recognizes that some factors may weigh more heavily in specific circumstances. The DOL even notes that additional factors may be relevant if those factors indicate whether a worker is in business for themselves (an independent contractor) or dependent on the employer for work (an employee). One particular aspect of importance for general contractors to consider is the nature and degree of control over the work. This factor comes into play in a variety of factors in the construction context – from managing schedules to ensuring compliance with safety regulations. In the Final Rule, the DOL noted that exercising control to comply with legal regulations would not be an indication of employment, but that going beyond specific legal requirements for its own convenience could be.

Strategies for Compliance with the New Rule and Mitigating Legal Risks

The classification question is critical – the determination that a particular individual is an employee triggers coverage under the federal Wage and Hour Act, meaning the employer is liable for minimum wage, overtime, and certain record-keeping requirements. Legal actions relating to overtime can last for years and be incredibly expensive. In order to mitigate those risks, the first step is to review the details of the rule itself or discuss these issues with an attorney. Potential employers should closely review any current classifications and policies relating to whether particular individuals are classified as employees or independent contractors.

Impact on Contractual Relationships

As noted above, one element of the Final Rule is the degree of control over an individual’s work. Minimizing that control, however, may have ramifications for contracts in which a contractor or subcontractor has promised to maintain certain standards. Striking the right balance may be difficult and will need to be evaluated on a case-by-case basis.