Since its 1938 debut, the Fair Labor Standards Act (FLSA) has wrestled with the slippery term “independent contractor.” Unlike “employee,” with its straightforward “employed by an employer” definition, “independent contractor” remains frustratingly undefined.
This lack of clarity has led to a tug-of-war between some employers and the Department of Labor (DOL). Businesses, eager to escape minimum wage and overtime requirements, often label workers as independent contractors. The DOL, meanwhile, is tasked with protecting worker rights under the FLSA.
To navigate this gray area, the DOL has generally relied on an “economic realities” test to determine classification, evaluating the extent of the worker’s economic dependence on the employer. In 2015, under the Obama Administration, the DOL’s Wage and Hour Division issued the ‘Administrator’s Interpretation 2015-1’, taking a worker-centric approach to classifying independent contractors versus employees under the FLSA. The Interpretation 2015-1 focused on “economic realities,” emphasizing a worker’s dependence on the employer as the key factor. This shifted the balance towards recognizing employees and ensuring their access to minimum wage and overtime protections.
Fast forward to 2021, the Trump Administration’s DOL adopted a more business-friendly perspective. The DOL issued the 2021 Rule, which codified a new independent contractor analysis that prioritized two “core factors”: employer control over the work and the worker’s potential for profit or loss. This de-emphasized economic dependence and, critics argued, significantly eased the path for classifying workers as independent contractors, potentially leaving them vulnerable to wage and hour violations.
The DOL’s Independent Contractor 2024 Final Rule
On January 10, 2024, the DOL published its Final Rule on employee or independent contractor classification under the FLSA. The Final Rule reverses course on the 2021 Independent Contractor Rule, opting for a return to the equally weighted six-factor “economic reality” test for determining worker classification. This new rule is set to go into effect on March 11, 2024, but has been challenged in court, so its effective date is uncertain.
The six-factor Economic Reality Test
The Final Rule includes the following six factors that will be considered in determining whether a worker is an employee or independent contractor:
- Opportunity for profit or loss depending on managerial skill.
- Investments by the worker and the potential employer
- Degree of permanence of the work relationship
- Nature and degree of control
- Extent to which the work performed is an integral part of the potential employer’s business
- Skill and initiative
These six factors serve as a guide. The Final Rule states they are not exhaustive and that no single factor is determinative. The DOL can also consider undefined factors that “in some way indicate” the worker’s independent business operation or economic dependence on the employer. However, the DOL doesn’t provide an indication as to what those factors might entail.
This shift back to a broader, less-defined approach leaves employers scratching their heads and may create classification challenges.
The impact of the DOL’s Final Rule varies across industries. Industries like technology, transportation, and gig economy businesses, which depend heavily on independent contractors, will likely feel the biggest impact. Despite the uncertain future of the Final Rule due to strong industry, congressional, and judicial opposition, employers should review their independent contractor agreements to ensure compliance with the broader terms of this new DOL rule.
It’s also important to note that the DOL’s Final Rule applies exclusively to worker classification under the FLSA. State laws regarding independent contractors can differ from federal guidelines. Employers must also ensure compliance with those to avoid costly misclassification pitfalls.
The DOL’s Final Rule brings about substantial change in worker classification. Understanding and strategizing within this evolving landscape will be paramount for business success.
For additional information on the Final Rule, visit the DOL’s website or contact your legal counsel.