Recently, the U.S. Department of Labor (DOL) issued its final rule on employee or independent contractor classification under the Fair Labor Standards Act (FLSA). This new rule, effective March 11, 2024, closely follows the DOL’s 2022 proposed rule, rescinding and replacing the 2021 Independent Contractor Status Under the FLSA Rule (2021 IC Rule).
The 2021 IC Rule
The 2021 IC Rule, published on January 7, 2021, less than three weeks before President Joe Biden took office, departed from the economic realities test long used by courts and the DOL to determine whether a worker is an employee or independent contractor under the FLSA.
The 2021 IC Rule identified five factors—two “core factors” carrying greater weight in the analysis and three less probative, “noncore factors”—to guide the inquiry into determining a worker’s status. The two core factors consisted of the nature and degree of control over the work and the worker’s opportunity for profit or loss.
The noncore factors included the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the potential employer, and whether the work was part of an integrated unit of production.
The New 2024 Rule
The new rule is more akin to the multifactor economic realities test courts have followed for several decades. The new rule uses a six-factor test, with no one factor being determinative. The new rule considers the totality of the circumstances of the working relationship, and no single factor carries a greater weight than another. These factors are:
- The degree to which the employer controls how the work is done;
- The worker’s opportunity for profit or loss;
- The amount of skill and initiative required for the work;
- The degree of permanence of the working relationship;
- The worker’s investment in equipment or materials required for the task; and
- The extent to which the service rendered is an integral part of the employer’s business.
The new rule isn’t tailored to any particular industry and is intended to be broadly applied to all types of workers. The DOL intends to release additional guidance to assist employers in complying with the new rule, some of which is likely to be industry-specific.
The new rule is considered to be more employee-friendly than the 2021 IC Rule, and the DOL has stated that the new rule “will reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.”
Acting Secretary of Labor Julie Su also stated in a press release that the new rule is designed to ensure “workers get the protections they need while also leveling the playing field for employers,” suggesting that businesses that misclassify workers have an unfair advantage over their law-abiding competitors.
Takeaway
In light of the new rule, employers using independent contractors should analyze such classifications against the six factors to determine the potential risk of continuing to classify such individuals as independent contractors. But the review shouldn’t end there. The National Labor Relations Board (NLRB) uses a similar test for determining independent contractor status under the National Labor Relations Act. This test uses factors similar to the DOL test that focus on the amount of control a company has over the work, the skill required for the job, and how the worker is paid but also considers whether the worker can realistically work for other companies, have ownership interests in their work, and have control over important business decisions.
Conceivably, the NLRB’s weight to these factors could result in a different conclusion as to independent contractor status than would the DOL’s new rule. You should therefore thoroughly review such classifications under both standards and seek legal counsel when unclear.
Martin J. Regimbal is a shareholder of The Kullman Firm in Columbus, Mississippi, and may be reached at mjr@kullmanlaw.com.