On January 9, 2024, the U.S. Department of Labor (“DOL”) issued a final rule (“Final Rule”) defining the term independent contractor under the Fair Labor Standards Act (“FLSA”), rescinding the previous definition of independent contractor outlined in 2021 (“2021 Rule”). The Final Rule establishes a six-factor test based on the economic reality of the worker and potential employer relationship and may have a substantial impact on a number of industries.
Under the FLSA, employees are entitled to minimum wage, overtime pay and other benefits. Independent contractors are not, though they typically have greater flexibility to set their own schedules.
In 2021, the DOL published a five-factor test to determine whether a worker is an employee or an independent contractor. These factors included the nature and degree of control over the work and the worker’s opportunity for profit or loss, which carried a heavier weight in the analysis of whether a worker was an independent contractor. Other factors that weighed less in the analysis were: the level of skill required to do the work, the degree of permanence of the working relationship between the worker and the potential employer, and whether the work was part of an integrated unit of production.
On October 13, 2022, the DOL published a “Notice of Proposed Rulemaking” on employee and independent contractor classification under the FLSA, with a proposal to rescind the 2021 Rule. After receiving comments regarding the 2022 proposed rule, the DOL finalized its proposal with some modifications.
New Independent Contractor Rule
With the Final Rule, the DOL has abandoned the “core factors” set forth in the 2021 Rule, returning to a “totality-of-the-circumstances” analysis of the economic reality test. Under this analysis, each of the factors should be weighed equally and are considered in “view of the economic reality of the whole activity.” The six factors include:
- Opportunity for Profit or Loss Depending on Managerial Skill
- Investments by the Worker and the Potential Employer
- Degree of Permanence of the Work Relationship
- Nature and Degree of Control
- Extent to Which the Work Performed is an Integral Part of the Potential Employer’s Business
- Skill and Initiative
These factors are not exhaustive, and other factors may be considered when those factors are “relevant to the ultimate question of whether workers are economically dependent on the employer for work or in business for themselves.”
The Final Rule differs significantly from the prior DOL guidance and the 2021 Rule. Under the 2021 Rule, employers would focus primarily on the two core factors – control over the work – and opportunity for profit or loss – when classifying workers. Now, as noted above, the Final Rule applies a multifactor, totality-of-the-circumstances analysis to evaluate whether a worker is an employee or an independent contractor under the FLSA.
The totality-of-the-circumstances test will require more time and resources to apply. Employers with 1099 workers should carefully review the new rule and make necessary changes to their classification policies and practices, accordingly. Employers should also be mindful of any state-specific rules that may differ from the Final Rule.