The U.S. Department of Labor (DOL) published its final rule on employee or independent contractor classification under the Fair Labor Standards Act (FLSA) on Jan. 10, 2024. The final rule is effective March 11, 2024. It implements a six-factor test for worker classification that is in line with judicial precedent. In effect, the final rule returns to a totality-of-the-circumstances analysis of "economic realities" when determining worker status with which many courts and employers are familiar. The final rule also rescinds the 2021 Independent Contractor Rule, which the DOL characterized as being inconsistent with the law and longstanding judicial precedent.

The final rule's six factors are as follows: 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, and 6) skill and initiative. The final rule states these factors are not exhaustive and that no single factor is determinative.

Additionally, the final rule removes the prior rule's prohibition against considering whether the work performed is central or important to the potential employer's business. The final rule emphasizes, as did the 2021 rule, that independent contractors are workers who, as a matter of economic reality, are in business for themselves. This contrasts with FLSA-covered employees who are, as a matter of economic reality, economically dependent on the employer.

Differences from the Proposed Rule

Although the final rule largely aligns with the text of the proposed rule¹, the final rule differs in several important areas of interpretation for the newly established test, including the following:

• The final rule refines its discussion of the "investments by the worker and the employer" factor. As adjusted in the final rule, the focus is on comparing the relative investments of the worker to determine if the worker is dedicating similar types of investments as the potential employer to see if the worker is operating independently, which would buttress independent contractor status.
• The final rule clarifies what type of control is indicative of employee status under the FLSA. The guidance makes clear that actions taken by a potential employer solely to comply with law are not indicative of control for purposes of independent contractor classification under the final rule. However, the final rule also says that a business's measures for safety, quality control, or contractual or customer service standards that go beyond law are potentially indicative of control.
• The final rule alters the DOL's interpretation when it comes to certain worker investments. The final rule specifies that costs to a worker of tools and equipment to perform a specific job, costs of the 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. In contrast, investments that are capital or entrepreneurial in nature indicate independent contractor status as supportive of 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.

Impact

The practical result of the final rule will be that many workers – including workers who want to be independent contractors – may now be more likely to be classified as employees under the FLSA. The increased number of factors and lack of any controlling factors will likely increase the ambiguity and variability in determining status, which may increase litigation and will increase enforcement discretion for DOL. Understanding the impact of the final rule is critical for all employers as workers cannot voluntarily waive or self-select their status under the FLSA.

Other Considerations

The final rule is strictly for the interpretation of employee vs. independent contractor classification under the FLSA. Different and typically narrower tests apply for determining employee status under, for example, the Internal Revenue Code (taxes), National Labor Relations Act (unionization), Title VII (discrimination) and common law (for tort liability and other purposes). The final rule is also what is called an "interpretive" rule, rather than a "substantive" rule. That means the rule informs the public of DOL's view of the law, but is not a binding regulation to which courts must defer. The final rule also does not directly affect independent-contractor classification for purposes of state employment laws. For instance, the final rule does not directly affect states that have implemented a California-style "ABC" test for classifying workers.

As of today, the lawsuit over DOL's 2021 delay and attempted withdrawal of the 2021 Independent Contractor Rule is still pending. The U.S. Court of Appeals for the Fifth Circuit paused the case pending DOL's issuance of its final rule. Already industry groups have signaled their interest in either continuing or instituting new lawsuits against the final rule. Despite the on-going and potential legal challenges, management should carefully review and evaluate their own classification policies and practices in light of the final rule, as DOL may use the final rule as the controlling standard for its enforcement activities.

The final rule does not identify or provide specific guidance for any particular industry or job type. For further analysis regarding the final rule's specific effects on the transportation industry, see Holland & Knight's previous blog post, "New Rule on Independent Contractor Classification Will Have Profound Impact on Businesses," Jan. 10, 2024. 

Notes

¹ U.S. Labor Department Issues Proposed Rule on Independent Contractors