There is a new U.S. Department of Labor (“DOL”) independent contractor rule that will impact employers and independent contractor classification.
On January 10, 2024, the DOL published a final rule revising guidelines for determining employee or independent contractor classification under the Fair Labor Standards Act (FLSA).
This final rule rescinds the Independent Contractor Status Under the FLSA rule (2021 IC Rule) published on January 7, 2021. The DOL states the new analysis for employee or independent contractor status aligns better with FLSA as interpreted by precedent.
The new independent contractor rule becomes effective March 11, 2024.
6 Factor Economic Realty Test
The final rule affirms workers aren’t independent contractors if economically dependent on an employer for work, based on economic reality.
The final rule applies the following six factors to analyze employee or independent contractor status under the FLSA:
(1) opportunity for profit or loss depending on managerial skill;
(2) investments by the worker and the potential employer;
(3) degree of permanence of the work relationship;
(4) nature and degree of control;
(5) extent to which the work performed is an integral part of the potential employer’s business; and
(6) skill and initiative.
A worker does not have to satisfy all the economic reality factors to qualify as an independent contractor. Instead, economic reality factors are weighed to assess if a worker is economically dependent on a potential employer, considering all circumstances.
Guidance on 6 factors
The final independent contractor rule provides detailed guidance regarding the application of each of these six factors. Employers should understand that no factor or set of factors among the six factors has a predetermined weight. Other factors matter if they indicate whether the worker is in business for themself (independent contractor) or economically dependent on the employer (employee under FLSA).
Employer control is still a crucial factor
The fourth factor considers the potential employer’s control. This includes reserved control over the performance of the work and the economic aspects of the working relationship. Employer control has historically been a key factor in the independent contractor rule and will continue to be given weight. More control by the potential employer favors employee status; more control by the worker favors independent contractor status.
According to the DOL, facts relevant to the potential employer’s control over the worker include whether the potential employer:
- sets the worker’s schedule;
- supervises the performance of the work; or
- explicitly limits the worker’s ability to work for others.
Additionally, relevant facts about the potential employer’s control include the use of technological means for supervision. Other relevant facts include:
- the right to supervise or discipline workers; and
- imposing restrictions that do not allow employees work for others or work when they choose.
Employers, therefore, should seek legal advice before having an independent contractor sign a noncompete covenant.
Additional employer actions to consider
Consider if the potential employer controls economic aspects, including prices, marketing, and rates for the worker’s services or products. Notably, actions solely for legal compliance, following federal, state, tribal, or local laws, do not suggest control by the employer. However, actions exceeding legal/regulation compliance and focus on the employer’s compliance methods, safety, quality control, or contractual or service standards may indicate control.
For example, a home care agency’s imposition of extensive provider qualifications, like comprehensive training requirements, may be probative of control.
Employment status cannot be waived
A worker cannot voluntarily waive employee status and choose to be classified as an independent contractor.
Under the FLSA, a worker is an employee (not an independent contractor) if economically dependent on the employer for work. Workers are free to choose which work opportunities are most suitable for them. However, if classified as an employee under the FLSA, they cannot waive protected rights like minimum wage or overtime pay.
Under the independent contractor rule, a worker who voluntarily signs an independent contractor agreement can still be misclassified. This is possible if the worker is economically dependent on the employer under the new rule. Stated otherwise, having an independent contractor agreement is not enough to prove an independent contractor relationship.
Do you need help to determine whether a worker is an employee or independent contractor under the new rule? As always, I am available to answer any of your questions.