Department of Labor Issues Final Rule on Employee–Independent-Contractor Classification Under the Fair Labor Standards Act

Department of Labor Issues Final Rule on Employee–Independent-Contractor Classification Under the Fair Labor Standards Act

 

 

Department of Labor Issues Final Rule on Employee–Independent-Contractor Classification Under the Fair Labor Standards Act

By: Josh Ordiway

On January 9, 2024, the United States Department of Labor unveiled a new rule for determining whether workers are classified as employees or independent contractors under the Fair Labor Standards Act, the federal law pertaining to minimum wage and overtime, as well as exemptions to the requirement to pay overtime. The new rule is generally meant to provide a ‘‘practical guide to employers and employees’’ as to how the DOL will seek to apply the FLSA. As a reminder, employees are covered by the FLSA while independent contractors are not. Therefore, employers facing actual or potential FLSA claims by workers who are arguably independent contractors should take note of the new rule, which contains the factors listed below. The rule will also apply to the FMLA, which is similarly administered by the DOL.

Importantly, this rule applies only to worker classifications under the FLSA and FMLA. For matters related to discrimination, retaliation, employment taxes, or any other employment issue—under either federal or state law—a different worker-classification test will likely apply.  For example, the EEOC uses a 16-factor test when considering coverage under the antidiscrimination statutes, the TWC uses a 20-factor test for unemployment and state antidiscrimination laws, and the IRS uses a 3-factor, common-law test for employer tax obligations. While no one factor is decisive across the various tests, the employer’s right of control is traditionally the most prominent; that said, the worker’s integration into the employer’s day-to-day operations is increasingly relevant.

In its new rule, the DOL has boiled down its test for worker classification into six factors, each of which assesses the economic realities of the working relationship in question:

  • The worker’s opportunity for profit or loss depending on his or her managerial skill;
  • Investments made by the worker and the employer;
  • The degree of permanence of the work relationship;
  • The degree of control an employer has over the work;
  • The extent to which work performed is integral to the employer’s business; and
  • The use of a worker’s skill and business-like initiative.

These factors embrace a totality-of-the-circumstances test, so no single factor will necessarily hold greater weight than another. The reality is that classifying workers under the FLSA is not a black-and-white matter—courts and the DOL will view these factors holistically and will ultimately focus on whether the worker is economically dependent on the employer. Additionally, these factors are non-exhaustive, meaning other factors might be considered as well in determining a worker’s classification.

This rule takes effect on March 11, 2024. If you have any questions regarding proper worker classifications under the FLSA or any other employment law, please do not hesitate to contact us.