US Department of Labor Issues Independent Contractor Final Rule

On January 10, 2024, the US Department of Labor (DOL) issued its long-awaited Final Rule for determining whether a worker is an “employee” versus an “independent contractor.” The Final Rule, which is set to become effective March 11, 2024, addresses how employers are to determine whether a worker is classified as an employee or an independent contractor under the FLSA.

Since the passage of the FLSA in 1938, various tests have been applied to determine whether a worker should be considered an employee and thus subject to the requirements of the FLSA for minimum wage, overtime, recordkeeping and other provisions. If an individual is found to be an “independent contractor,” rather than an employee, the protections of the FLSA do not apply. However, simply calling a worker an “individual contractor” is not sufficient to make it so. Many employers have learned this lesson the hard way when a complaint is filed or the DOL conducts an investigation. Over the years, courts have developed various methods of determining whether an individual is an employee vs. an independent contractor. Misclassification of workers as independent contractors can lead to significant costs for employers, including back pay, penalties and attorneys fees.

In the Final Rule, the DOL has set out six factors (actually seven) to guide employers with respect to the analysis. The new factors are as follows:

(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 – whether the potential employer uses technological means to supervise the performance of the work (such as by means of a device or electronically), reserves the right to supervise or discipline workers, or places demands or restrictions on workers that do not allow them to work for others or work when they choose. Whether the potential employer controls economic aspects of the working relationship should also be considered, including control over prices or rates for services and the marketing of the services or products provided by the worker.
(5) Extent to which the work performed is an integral part of the potential employer’s business;
(6) Skill and initiative; and
(7) Additional factors. Additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.

Lawsuits have been filed to stop the new independent contractor rule from taking effect, but their outcome is uncertain. If your business utilizes independent contractors, you may wish to discuss the future validity of doing so with an employment law attorney.