New Department of Labor Rule to Impact Independent Contractor Status

Effective March 11, 2024, a new final rule of the Department of Labor will be used to determine who is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The final rule rescinds the 2021 rule and replaces it with an economic realities test that relies on the totality of the circumstances. Consistent with judicial precedent and the Department’s interpretive guidance prior to 2021, the final rule applies six factors to analyze employee or independent contractor status under the FLSA. These factors include: (1) opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the potential employer; (3) degree of permanence of the work relationship; (4) nature and degree of control; (5) extent to which the work performed is an integral part of the potential employer’s business; and (6) skill and initiative.

Under the new rule no single factor or group of factors is assigned any predetermined weight. This rule focuses on additional analysis of the control factor, including a detailed discussion of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the nature and degree of control over a worker. Further, the new rule returns to consideration of whether the work is integral to the employer’s business and provides additional context to some factors, including a discussion of exclusivity in the context of the permanency factor and initiative as to the skill factor. The new rule omits a provision from the 2021 rule that minimized the relevance of an employer’s reserved but unexercised rights to control a worker.

As the Department has underscored, a title or label is irrelevant and agreeing verbally or in writing to be classified as an independent contractor—including by signing an independent contractor agreement—does not make a worker an independent contractor under the FLSA. It is important for employers to correctly classify workers as misclassification can be costly and result in employers failing to pay minimum wage and overtime pay or to provide other benefits and protections. Employers are well served to review their classifications to ensure that the workers constitute independent contractors under the new rule.