On January 9, 2024, the U.S. Department of Labor’s (“DOL”) Wage and Hour Division announced issuance of a new final rule titled “Employee or Independent Contractor Classification Under the Fair Labor Standards Act” to help employers and workers have a better understanding of when a worker qualifies as an employee and when they may be considered independent contractors under the Fair Labor Standards Act (“FLSA”). This final rule rescinds the “Independent Contractor Status Under the Fair Labor Standards Act” (2021 IC Rule) that was published on January 7, 2021, by the DOL.

Essentially, the DOL recognized that the 2021 IC Rule marked a departure from the longstanding “economic reality test” adopted by courts and the DOL to determine whether a worker is an employee or an independent contractor under the FLSA. It identified 5 economic reality factors to guide said inquiry, but designated 2 of those factors —i.e. the nature and degree of control over the work and the worker’s opportunity for profit or loss— as “core factors” that were the most probative and carried greater weight in the analysis. If these 2 core factors point towards the same classification, there is a substantial likelihood that it is the worker’s accurate classification. The other 3 factors —the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production— were considered as less probative non-core factors. Hence, said prior rule stated that it was “highly unlikely” that these 3 non-core factors could outweigh the combined probative value of the 2 core factors. Furthermore, said rule limited consideration of investment and initiative to the opportunity for profit or loss factor in a way that narrowed, in at least some circumstances, the extent to which investment and initiative are considered. The facts to be considered under other factors (such as control) were also narrowed, and the factor that considers whether the work is integral to the employer’s business was limited to whether the work was part of an integrated unit of production. Finally, under the 2021 IC Rule the actual practice of the parties involved was more relevant than what could be contractually or theoretically possible.

In sum, after careful consideration, the DOL concluded it was appropriate to rescind the 2021 IC Rule and set forth guidance for determining employee vs independent contractor status that is more consistent with longstanding judicial and administrative precedent. As used in the new final rule the term “independent contractor” refers to workers who, as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves. To those effects, the new final rule restores the totality-of-the-circumstances multifactor analysis that has been generally applied since the 1940’s by the DOL and courts, ensuring that all relevant factors are analyzed to determine whether a worker is an employee or an independent contractor, with no factor or factors having predetermined weight. The six factors addressed by the new final rule are:

1. Any opportunity for profit or loss a worker might have.
2. The financial stake and nature of any resources a worker has invested in the work.
3. The degree of permanence of the work relationship.
4. The degree of control an employer has over the person’s work.
5. Whether the work the person does is essential to the employer’s business.
6. Factors regarding the worker’s skill and initiative.

The final rule also provides guidance on how those 6 economic reality factors should be considered and, among other things, provides broader discussion of how scheduling, remote supervision, price setting, and the ability to work for others should be considered under the control factor. Furthermore, it allows for consideration of reserved rights while removing the provision in the 2021 IC Rule that minimized the relevance of retained rights. The final rule also discusses exclusivity in the context of the permanency factor, and initiative in the context of the skill factor. Lastly, in addition to these 6 factors, other factors may also be relevant to the extent that they may, in some way, indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.

Scope and Applicability of the DOL Final Rule

The regulatory guidance promulgated in this final rule is generally applicable across all industries and will go into effect on March 11, 2024. Therefore, it is important for employers to be aware and up to date with the current guidance and rules implemented by the DOL to assure compliance with legal obligations under the FLSA and applicable regulations concerning the proper classification of workers as employees or independent contractors.

If you have any questions or comments regarding these recent developments that impact the employment landscape, please contact any of the following attorneys from our Labor & Employment Practice Group at your convenience: