Department of Labor Releases New Independent Contractor Rule
On January 10, 2024, the Department of Labor (DOL) released a final rule detailing how to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The new rule rescinds a 2021 rule on how to distinguish employees and independent contractors and replaces it with a new standard. The new rule is scheduled to go into effect on March 11, 2024.
Background
The FLSA requires that non-exempt employees of covered employers be paid at least the Federal minimum wage and overtime for hours worked in excess of 40 hours in a workweek. To be covered by the FLSA, a worker must be considered an “employee” under the law rather than an independent contractor. Workers who are independent contractors are not covered by the FLSA and therefore employers are not required to meet FLSA requirements when to comes to independent contractors.
2021 Rule
The 2021 Rule adopted an economic reality test to determine whether a worker was economically dependent on a business, and therefore an employee covered under the FLSA, or whether a worker was in business for themselves, and therefore an independent contractor not covered under the FLSA.
The 2021 Rule provided five distinct factors for determining a worker’s status as an employee or independent contractor with two core factors—nature and degree of control over the work and the individual’s opportunity for profit or loss—being the most important in the analysis. Additional factors included: the amount of skill required for the work, the degree of permeance of the working relationship, and whether the work is part of an integrated unit of production. However, the additional factors only needed to be considered if the two core factors did not indicate whether the worker was an employee or independent contractor.
New Rule-Totality of Circumstances Analysis
The new rule retains the economic reality test that a worker is an employee if they are economically dependent on a business and an independent contractor if they are in business for themselves but changes the analysis to reach that conclusion.
The economic reality test now requires a “totality of the circumstances” analysis to determine economic dependence. Under the totality of the circumstances analysis there are six non-exhaustive factors that must be considered. The factors are:
- Opportunity for profit or loss depending on managerial skill
• A worker is more likely to be an employee if they have no ability for a profit or loss beyond working more hours or taking more jobs when paid a fixed rate per hour or per job.
• A worker is more likely to be an independent contractor if they can exercise managerial skill, such as marketing themselves and hiring others, to affect their profit or loss. - Investments by the worker and the potential employer
• A worker is more likely to be an employee if they do not make investments that are capital or entrepreneurial in nature and are not the type of investments an employer would make.
• A worker is more likely to be an independent contractor if they make investments that are capital or entrepreneurial in nature and are akin to the type of investment an independent business would make. - Degree of permanence of the work relationship
• A worker is more likely to be an employee if the work is indefinite in duration, continuous, or prevents them from working for other potential employers.
• A worker is more likely to be an independent contractor if the work is definite in duration, does not prevent them from working for other potential employers, is project-based, or is sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities. - Nature and degree of control of the work
• A worker is more likely to be an employee if more indicators of control are held by the potential employer.
• A worker is more likely to be an independent contractor if more indicators of control are held by the worker. - Extent to which the work performed is an integral part of the potential employer’s business
• A worker is more likely to be an employee if the worker performs work that is critical, necessary, or central to the potential employer’s principal business.
• A worker is more likely to be an independent contractor if the worker performs work that is not critical, necessary, or central to the potential employer’s principal business. - Skill and initiative of the worker
• A worker is more likely to be an employee if the specialized skills they have are not used in a manner that suggests business like initiative.
• A worker is more likely to be an independent contractor if the specialized skills they have are used in a manner that suggests business like initiative.
Under the totality of circumstances analysis, no single factor carries more weight than another and the determination must be made in light of the facts and circumstances of each situation. The test permits additional relevant factors to be considered as necessary. The DOL believes this new test is more in line with court decisions regarding the employee versus independent contractor distinction under the FLSA prior to the 2021 Rule.
Key Takeaways:
The final rule changes how workers are categorized as employees or independent contractors under the FLSA. If your organization has questions about the application of this rule, you should work with your legal counsel or a labor law expert so your organization is ready to remain compliant when this new standard is implemented on March 11, 2024.
The information provided is a summary of laws and regulations relating to employee benefit plan compliance. This information should not be construed as legal advice. In all cases, employers should consult with their own legal counsel.
