Today, the U.S. Department of Labor (“DOL”) published its final rule (the “Rule”) addressing whether a worker is properly classified as an employee or an independent contractor under the federal Fair Labor Standards Act.

The DOL styles its standard as a “totality-of-the-circumstances” test.  According to the DOL, the Rule is intended to examine whether, as a matter of economic reality, a worker is economically dependent on the employer for work (an employee) or in business for themselves (an independent contractor).   The Rule, which will be effective March 11, 2024, applies the following six non-exhaustive factors, none of which has any predetermined weight:

I. A worker’s opportunity for profit or loss depending on the worker’s managerial skill—including:

• 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 the foregoing apply, this factor suggests that the worker is an independent contractor.

II. The worker’s investments into the business versus those of the potential employer. Here, the DOL will consider “whether any investments by a worker are capital or entrepreneurial in nature”—i.e., investments that “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.”  In contrast, costs incurred by the worker for tools and equipment to perform a specific job, as well as the worker’s own labor and costs that the employer imposes unilaterally on the worker are not considered capital or entrepreneurial and would suggest that the worker is an employee.

III. The degree of permanence of the work relationship:

• If the work relationship is indefinite in duration, continuous, or exclusive of work for other employers, this factor suggests the worker is an employee.
• If 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 factor suggests the worker is an independent contractor.

IV. The nature and degree of control a potential employer has over the performance of the work and economic aspects of the relationship. Examples include whether the employer sets the worker’s schedule, supervises the work (by technology or otherwise), imposes discipline, limits the worker’s ability to work for others, controls prices or rates for services, or controls worker’s marketing of their services or products.  The more control exerted by the putative employer, the more this factor suggests an employment relationship.

V. The extent to which the work performed by the worker is an integral part of the employer’s business. This factor does not examine whether the worker is integral, but rather whether the function is.  “In most cases, if a potential employer’s primary business is to make a product or provide a service, then the workers who are involve in making the product or providing the service are performing work that is integral to the potential employer’s business.”  If the function is integral, this factor would suggest an employment relationship.

VI. Whether a worker “uses specialized skills to perform the work and whether those skills contribute to business-like initiative.” If the worker does not use specialized skills in performing the work or if the worker is dependent on training from the employer to perform the work, this factor suggests the worker is an employee.  But according to the DOL, specialized skill alone is not enough to establish independent contractor status—“[i]t is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.”

The Rule replaces a Trump-era rule from 2021 that focused primarily on two “core factors”—the nature and degree of control over the work, and the worker’s opportunity for profit or loss (i.e., factors 1 and 4 above).  The Rule is broad and sometimes vague, especially factors 2 and 6.  Given the “totality of circumstances” approach, the factual nature of any classification inquiry and that no factor is weighed more heavily than any other, the Rule is likely to result in inconsistent application across courts and other tribunals.

Employers should examine the relationships they have with workers and consider whether to reevaluate certain independent contractor classifications.  Consequences of misclassification may include liability for unpaid wages, overtime, benefits and taxes, as well as additional legal fines, penalties and attorneys’ fees.