Employment / 5 min read
The Department of Labor recently issued a new final rule on determining what workers are employees and what workers are independent contractors. This distinction is important as employers generally must provide minimum wage and overtime pay protections to their employees and comply with the law’s recordkeeping obligations. Meanwhile, protections under the Fair Labor Standards Act do not apply to independent contractors.
The new final rule replaces the rule originally put forth by the Trump administration which focused on two core factors: control over the work and opportunity for profit or loss. But the new rule requires employers to use a totality-of-the-circumstances analysis. The six equally weighted factors employers must consider under the new test 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.
- The extent to which the service rendered is an integral part of the employer's business.
Nature and Degree of Control
To determine the nature and degree of control, the focus is on whether a potential employer determines the worker’s schedule, manages the work being performed, or explicitly restricts the worker’s ability to perform work for other parties. Employers should consider several questions to determine their degree of control over the worker, including whether the potential employer uses technological means to supervise the performance of the work (such as by means of a device or electronically), whether they reserve the right to supervise or discipline workers, or place demands or restrictions on workers that do not allow them to work for others or work when they choose. Notably missing from the new rule is a former provision which minimized the relevance of an employer’s reserved but unexercised rights to control a worker, which means employers can no longer rely on that exception.
Opportunity for Profit or Loss Depending on Managerial Skill
For this factor, employers should weigh whether the worker can negotiate the compensation for the work performed, if the worker is able to accept or decline work and determine the schedule of performance, if the worker markets or advertises to secure additional work, and if the worker has the authority to buy equipment or materials and secure space to perform the work.
Skill and Initiative
Also relevant to this analysis is a worker’s skill and initiative. To determine whether a worker’s specialized skills in performing the work suggest employee or independent contractor status, potential employers should consider whether the specialized skills contribute to business-like initiative. Where a worker depends on training from the potential employer to perform their work and does not bring any specialized skills, an employment relationship is more likely to be determined.
Degree of Permanence of the Work Relationship
In evaluating this factor, one must consider if a work relationship is “indefinite in duration, continuous, or exclusive of work for other employers” may be more indicative of an employment relationship. For an independent contractor relationship to be present, the Final Rule notes that the work relationship would likely be “definite in duration, nonexclusive, project-based, or sporadic” due to the worker being engaged in their own business and performing work for other parties. This may include regularly occurring fixed periods of work, although the seasonal or temporary nature of work by itself would not necessarily suggest independent contractor classification.
Investments by the Worker and the Potential Employer
For this factor, the focus is on whether any investments by a worker are capital or entrepreneurial. Costs that are unilaterally imposed on a worker by a potential employer are not evidence of capital or entrepreneurial investment and generally reflect employee status. But investments by a worker to expand the types of work they can perform or increase their market presence are closer to an independent contractor as they are capital or entrepreneurial and serve a business-like function.
Extent to Which the Work Performed Is Vital to the Potential Employer’s Business
In evaluating this factor, employers should focus their analysis on whether the function being performed by the workers is central to the employer’s business. Workers who perform functions that are critical, necessary, or central to the potential employer’s principal business are more likely to be classified as employees.
This factor does not depend on whether any individual worker in particular is integral to the business, but whether the function they perform is vital to the business.
Employer Takeaways
The “ultimate inquiry” under the final rule is whether a worker is economically dependent on an employer, thus employers should classify workers accordingly. Whether a worker is economically dependent on the employer for work (i.e., an employee under the FLSA) or is in business for themself (i.e., an independent contractor) provides more context to some factors, delving into exclusivity in the context of the permanency factor and initiative in the context of the skill factor. Because of the current historically tight labor market and rising levels of worker activism, as shown by headline-generating union drives and related litigation, all employers that use independent contractors should consider revisiting how they classify workers in light of the DOL’s final rule. Employers should prepare for vigorous DOL enforcement of the final rule and an increase in lawsuits from current and former employees alleging FLSA misclassification.
Businesses that often rely on franchising, subcontracting, and staffing firms should pay particular attention to the types of workers that they classify as independent contractors, as they may face greater regulatory scrutiny and legal exposure under the DOL’s final rule.
ABC Test
Somewhat comfortingly, the DOL’s final rule does not adopt the even more pro-employee “ABC” test that some states, such as California and New Jersey, apply under state analogues to the FLSA. Unlike the ABC test, where employers must satisfy each of three factors to properly classify workers as independent contractors, the DOL’s economic realities test applies a nonexhaustive six-factor analysis, with no single factor being dispositive.
This final rule is effective on March 11, 2024.