On January 9, 2024, the U.S. Department of Labor (“DOL”) issued a long-awaited Final Rule that addresses when a worker is properly classified as an independent contractor under the Fair Labor Standards Act (the “FLSA”). Under its new Rule, independent contractors are characterized as those workers who, as a matter of economic reality, are not economically dependent on an employer for work; rather, they are in business for themselves.
The FLSA establishes, among other things, the federal minimum wage and requires covered employers to pay their employees one and one-half times the employee’s regular rate for hours worked over 40 in a workweek. Thus, the FLSA, with its minimum wage, overtime, and other protections for employees, does not apply these protections to independent contractors.
DOL’s Final Rule – titled simply Employee or Independent Contractor Under the Fair Labor Standards Act – establishes six familiar factors to evaluate whether a worker is an independent contractor or an employee subject to the FLSA. These factors are as follows:
- A worker’s opportunity for profit and loss depending on managerial skill (including initiative, business acumen, or judgment)
- Investments made by the worker and potential employer
- Degree of permanence of the work relationship
- Nature and degree of control (including, e.g., setting of the worker’s schedule, using technological means to supervise performance, reserving the right to supervise or discipline, controlling the price or rate for services, and marketing the services or products)
- Extent to which the work performed is an integral part of the potential employer’s business
- Use of a worker’s skill and initiative.
None of these factors is given any predetermined weight, as the DOL says they are considered in “the view of the economic reality of the whole activity.” Nor do these factors represent an exhaustive list of things to be considered in determining whether the worker is an employee or independent contractor. In other words, these non-exhaustive factors are tools to help with a totality-of-the-circumstances analysis, but the ultimate inquiry remains whether the worker depends on the company for work (an employee), or whether they are in business for themselves (an independent contractor).
The DOL stresses in its preamble to the Final Rule that this Rule will not disrupt the business of true independent contractors, self-employed individuals, and freelancers. However, despite these assurances, the Final Rule appears to narrow the circumstances under which a worker might be properly classified as an independent contractor.
The Final Rule becomes effective on March 11, 2024. Now is a great time for all employers to take a fresh look at their worker classifications and to evaluate whether any workers may need to be reclassified in light of these recent changes.
If you have any questions about workers classifications, please reach out to any member of the McNees Labor & Employment group.