Final rule under Fair Labor Standards Act on Employee/Independent Contractor Classification Takes Effect

On March 11, 2024, the US Department of Labor’s final rule under the Fair Labor Standards Act (FLSA) on employee/independent contractor classification takes effect.  The new final rule, published on January 10, rescinds and supersedes the 2021 Department of Labor Independent Contractor rule, and will help businesses accurately classify workers and comply with minimum wage, overtime and other workplace protections.  It also helps workers negotiate and understand their status, rights, and entitlements under the FLSA.

The new rule establishes “economic dependence” as the standard for determining status, and prescribes six equally weighted factors to consider when classifying a worker:

• Opportunity for the worker to attain more profit or loss depending on managerial skill, business acumen, or judgment;
• Investments by the worker and the potential employee –  investments that are capital or entrepreneurial in nature augur toward independent contractor status;
• Degree of permanence of the work relationship – longer term work arrangement, frequency and intermittency, and year round work relationships affect this determination;
• Nature and degree of control – how much direction the worker is given regarding how and when the worker performs work tasks, including scheduling, supervision, and price-setting;
• Extent to which the work performed is an integral part of the potential employer’s business – how important the work is to the overall business’ success;
• Skill and initiative – how much “ownership” does the worker employ with regard to his tasks, and how important are his or her skills to the end product?

A worker may not voluntarily waive employee status – he or she either is or is not an employee for the purposes of classification.  Business owners must alter their labor arrangements to benefit from workers with independent contractor status, rather than negotiating status as a term of the commercial relationship.

The new rule constitutes a totality of the circumstances economic reality test.  No factor or group of factors is more significant than others at the outset, though on analysis of specific facts, certain of the factors may become more weighty or important.

Finally, the IRS “20 factor” test for employee/independent contractor classification are not irrelevant to the USDOL 6 factor analysis.  Rather, the 20 factor test can likely best be binned into the six factor categories to give them meaning.  For example, IRS Factor 6, Continuing Relationship, is relevant to USDOL Factor 3, degree of permanence of the work relationship.  IRS Factor 15, Significant Investment, is germane to considering USDOL Factor 2, Investments.

The new FLSA classification rule does not represent a watershed rule change, but rather an effort by USDOL to provide businesses, advisors, and courts more useful direction on classification, both to give clear guidance to businesses and to help workers protect their own rights to certain entitlements and protections.