Employers are quick to classify workers as independent contractors because independent contractors are not entitled to the benefits and protections afforded to employees (such as wage and hour laws, overtime pay, worker’s compensation insurance, employment taxes, employee benefits). However, there are rules employers must follow to ensure workers are classified correctly.
The most recent rule on independent contractor classification was published on January 10, 2024 by the Department of Labor (DOL) (the “Final Rule”). The Final Rule repeals the 2021 “core factors” test and becomes effective on March 11, 2024.
The Final Rule looks at the “totality of the circumstances” to determine whether a worker is classified as an employee or an independent contractor under the Fair Labor Standards Act (FLSA). To make such a determination, the following six “economic realities” factors are used as guidance, with no one factor carrying more weight than another:
- 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; and
- Skill and initiative.
The Final Rule also allows for consideration of other factors outside of these six-factors, if such additional factors would be relevant to determine a worker’s economic dependence on the employer. Notably however, the DOL declined to propose any specific additional factors.
The Final Rule only revises the DOL’s interpretation under the FLSA. It has no effect on other federal, state, or local laws that use different standards for employee classification such as the Internal Revenue Code, National Labor Relations Act or state wage-and-hour laws.
The Final Rule may create classification challenges for employers and will likely become a heavily litigated rule. As such, employers should review the Final Rule carefully, analyze independent contractor/employee classifications, and update their classification policies and any independent contractor agreements accordingly. To aid employers in this endeavor, the DOL has published answers to frequently asked questions about the Final Rule.
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