Independent Contractor Final Rule

The United States Department of Labor issued a final rule setting the parameters employers must use to distinguish between employees and independent contractors.

Whether a worker is classified as an employee or an independent contractor is an important Fair Labor Standards Act considerations. Independent contractors are in business for themselves while employees work for the employer. The distinction is important because the law provides certain protections to employees and employers provide benefits to employees, not contractors. The misclassification of an employee as an independent contractor may deny individuals minimum wage, overtime pay and other protections.

The final rule becomes effective March 11, 2024 it rescinds the Independent Contractor Status under the FLSA rule published January 7, 2021 which established a three prong test. The new analysis for determining independent contractor or employee status revers back to a prior economic reality test which relies on the totality of the circumstances with no one determinative factor.

This final rule says worker is not an independent contractor if they are, as matter of economic reality, economically dependent on an employer for work. The following six factors are used analyze employee or independent contractor status under:

(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.

The final rule provides detailed guidance regarding the application of each of these six factors. No factor or set of factors among the list of six has a predetermined weight, and additional factors may be relevant if such factors in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work (i.e., an employee under the FLSA).

This final rule differs from the guidance provided in the 2021 Independent Contractor Rule in several ways. Specifically, the final rule:

• Returns to a totality-of-the-circumstances economic reality test, where no single factor or group of factors is assigned any predetermined weight;
• Considers six factors (instead of five), including the investments made by the worker and the potential employer;
• Provides 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;
• Returns to the Department’s consideration of whether the work is integral to the employer’s business (rather than whether it is exclusively part of an “integrated unit of production”);
• Provides additional context to some factors, including a discussion of exclusivity in the context of the permanency factor and initiative in the context of the skill factor; and
• Omits a provision from the 2021 Independent Contractor Rule which minimized the relevance of an employer’s reserved but unexercised rights to control a worker.

Read the final rule in the Federal Register.