Department of Labor issues new, six-factor test for independent contractor classification.
On January 10, 2024, the U.S. Department of Labor (DOL) published a final rule that provides guidance on whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The rule will take effect on March 11, 2024.
The rule rescinds the 2021 Independent Contractor Rule issued by the Trump administration, which was criticized for being too narrow and increasing the likelihood of misclassification. The 2021 rule proposed a five-factor test but asked employers and courts to focus mainly on two “core” factors in the analysis – the principal’s (potential employer’s) right to control the worker, and the worker’s opportunity for profit and loss.
The new rule returns to the multifactor, totality-of-the-circumstances analysis to assess the economic reality of the work relationship. The rule now considers six factors, without assigning a predetermined weight to any of them:
Opportunity for profit or loss depending on managerial skill.
This factor considers whether the worker has opportunities for profit or loss based on their initiative, business acumen, or judgment. For example: do they negotiate their rates, can they reject work offered to them, do they hire their own workers and purchase their own equipment/tools, and do they market or advertise their work to entities other than the potential employer? If the answer to these questions is “yes”, this would indicate independent contractor status.
Investments by the worker and potential employer.
This factor considers whether any investments by the worker are capital or entrepreneurial in nature. Investments by a worker that increase sales, clients, and market reach, for example, would weigh in favor of independent contractor status. Conversely, costs to the worker of tools, equipment, or labor that are imposed on him/her by the potential employer are not evidence of capital or entrepreneurial investment and indicate employee status.
Degree of permanence of the work relationship.
This factor weighs in favor of employee status “when the work relationship is indefinite in duration, continuous, or exclusive of work” for other companies. It weighs in favor of contractor status “when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services to…multiple entities.”
The DOL recognized that there are long-term relationships that exist between employer and contractor, and short-term relationships that exist between employees and employers. Therefore, the DOL states that “industry-specific analyses for the permanence factor” are relevant and necessary. In addition, the DOL warns that “the mere ability to work for others is not necessarily an indicator of independent contractor status.”
Nature and degree of control
This factor considers whether the worker or the potential employer exercises substantial control over key aspects of the work, such as the schedule, location, manner, quality, or quantity of the work. More control by the worker indicates independent contractor status, while more control by the potential employer indicates employee status. The DOL will consider the following: “who controls hiring, firing, scheduling, prices, or pay rates…who supervises the performance of the work…who has the right to supervise or discipline workers; and... [does the employer] take actions that limit the worker’s ability to work for others.”
The greater the control the employer has over the worker’s daily duties and responsibilities, the more likely it will be viewed as an employer/employee relationship.
Extent to which the work performed is integral of the potential employer's business.
This factor weighs in favor of the worker being an employee when the work performed is essential or core to the potential employer’s business, or when the worker’s work is integrated with or dependent on the work of the potential employer’s employees. For example, consider a person who waters the office plants at a law firm on a set schedule, but does nothing else for the law firm. The law firm is not in the business of selling or caring for plants, so that person would be seen as an independent contractor, barring other connections to the employer’s business.
Skill and initiative
This factor considers whether the worker uses specialized skills, training, or education to perform the work and support their business efforts. This factor requires an analysis into whether the worker has business initiative and uses that initiative to propel and support their business efforts. The DOL provides the comparison of a welder who works for a welding company and does the work assigned to him by that company (employee) with a specialty welder who provides custom welding to various companies, and uses and markets his skills in order to benefit his business efforts (contractor).
According to the DOL, additional factors may be considered as well, should the situation warrant such consideration outside of the six factors specified in the rule.
The new rule is intended to provide clarity, consistency, and predictability for workers and employers, and to ensure that workers who are employees under the FLSA receive the minimum wage and overtime protections they are entitled to, while also recognizing the important role of independent contractors in the economy. However, litigation on the new rule is pending, and courts will be the ultimate decision-makers on whether the 2024 rule is valid and, if so, how it is interpreted.
Employers should use this opportunity to evaluate their independent contractor relationships and ensure that those workers are properly classified. In addition, employers should keep in mind that other laws, including the National Labor Relations Act and state and federal discrimination laws, have a different approach to this issue, and must be considered.
Samantha (“Sam”) Otero counsels employers and executives in all aspects of employment law. Sam routinely advises her clients on the requirements they face in hiring, employment policies, layoffs, discipline, EEOC Charges, discrimination allegations, and wage and hour issues, including overtime and classification determinations. She also defends allegations of harassment as well as disputes arising out of employment contracts, including covenants not to compete.