On January 10, 2024, the U.S. Department of Labor (“Department”) published a final rule (“Final Rule”) for determining independent contractor status under the Fair Labor Standards Act (“FLSA”). The Final Rule rescinds the Department’s 2021 Trump-era rule.
Background
Until 2021, neither the FLSA nor Department regulations defined “independent contractor.” To fill that void, the Department published the 2021 rule. The 2021 rule identified five economic reality factors to determine a worker’s status; however, its primary focus was on (1) the nature and degree of control over the work and (2) the worker’s opportunity for profit and loss.
Current Position
The Department’s current position is that the 2021 rule (1) impermissibly narrowed which factors should be considered when classifying workers as independent contractors and (2) improperly weighed certain factors over others.
As a result, the Final Rule codifies six factors, which courts have been weighing for decades, into one “economic reality” test. This test is supposed to determine whether a worker is “economically dependent on the potential employer for work or is in business for themselves.” The Final Rule’s six factors include:
- Opportunity for profit or loss depending on managerial skill. Employers should consider:
- can the worker determine or meaningfully negotiate pay?
- can the worker accept or decline jobs?
- can the worker choose the order and/or time in which jobs are performed?
- can the worker engage in marketing, advertising, etc. to expand their business?
- Investments by the worker and the potential employer. Employers should know this factor is determined on a relative basis and will consider whether the worker provides their own tools, vehicles, and other items. For example, if the worker makes similar investments, but on a smaller scale, it is more likely the employee is an independent contractor.
- Degree of permanence of the work relationship. Employers should know that if the relationship is indefinite, continuous, or exclusive of other work, it is more likely the worker is an employee.
- Nature and degree of control. This factor considers the extent to which workers set their own schedule, have their performance supervised by the potential employer, and whether the potential employer reserves the right to supervise or discipline the worker. It does not include actions taken by the potential employer for the sole purpose of complying with a specific law or regulation.
- Extent to which the work performed is an integral part of the potential employer’s business. Where the work performed is integral to the business, a worker is more likely to be classified as an employee. Significantly, the key question is whether the work or function performed is integral to the business, not whether the worker is an integral part of the business.
- Skill and initiative. Employers should ask whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative because if a worker is dependent on training from the business to perform the work, instead of possessing specialized skills, a worker is more likely to be classified as an employee.
What Should Employers Do
The Final Rule is set to take effect on March 11, 2024. Employers, therefore, have time to evaluate whether workers have been misclassified as independent contractors. Prudent employers should be pro-active since misclassification of independent contractors is a significant focus of both the Department and the National Labor Relations Board. The employment attorneys at Poyner Spruill will continue to monitor developing case law interpreting the Final Rule as there is still much left open to interpretation.
