On January 9, 2024, the U.S. Department of Labor (the “DOL”) announced a final rule regarding who is an “independent contractor” under the Fair Labor Standards Act (the “FLSA”) (the “Final Rule”). The Final Rule largely follows the rule that was proposed in October 2022, and rejects the rule that was issued by the DOL during the Trump Administration. The Final Rule is expected to face litigation.
The Final Rule uses a six-factor, totality of the circumstances test that focuses on the economic realities of the worker’s relationship with the potential employer and whether the worker is economically dependent on the potential employer or in business for themself. The Final Rule can be found here and is scheduled to take effect on March 11, 2024.
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Background
In July 2015, during the Obama Administration, the DOL published an Administrative Interpretation providing guidance on the DOL’s position that “most workers are employees.” The guidance set forth a rigorous six-factor test for analyzing when workers would be considered independent contractors. The guidance stated that the primary focus of the economic realities test should be whether a worker is economically dependent on the employer. Our memorandum addressing the guidance is available here.
During the Trump administration, in June 2017, the DOL withdrew the Obama-era guidance. Then, in January 2021, the Trump administration DOL published a final rule establishing a new test for determining whether a worker is an employee or an independent contractor under the FLSA. The test used five factors to evaluate whether a worker is “economically dependent” on an employer, focusing on two “core” factors: “the nature and degree of control over the work” and “the individual’s opportunity for profit or loss.” Under the 2021 rule, if these two factors weighed in favor of the same classification, “there is a substantial likelihood that is the individual’s accurate classification.” Our memorandum addressing the January 2021 rule is available here.
Four days before the rule would have taken effect in March 2021, the DOL under the Biden administration delayed the effective date of the Trump-era rule and later withdrew it entirely. But, the following year, in March 2022, a federal district court in Texas invalidated the delay and withdrawal of the January 2021 rule and reinstated it.
On October 11, 2022, the DOL proposed a new rule that would reinstate the “economic realities” test for classifying independent contractors under the 2015 rule. We previously discussed the proposed rule here.
The Current Rule
On January 9, 2024, following a 61-day comment period terminating on December 13, 2022, the DOL announced the Final Rule, which largely adopted the October 2022 proposed rule. In its announcement, the DOL stated that the Final Rule “aligns with longstanding judicial precedent on which employers have previously relied to determine a worker’s status as either an employee or independent contractor” and will “preserve essential worker rights and provide consistency for entities covered by” the FLSA.
The Final Rule rejects the use of “core factors” put forth in the 2021 rule and reinstates the totality of the circumstances economic reality test in which all factors carry equal weight and are “considered in view of the economic reality of the whole activity” in the analysis of whether a worker is an employee or an independent contractor. The DOL explained that the totality of the circumstances approach best “align[s] with the Department’s decades-long approach (prior to the 2021 IC Rule) as well as with federal appellate case law” and “is more consistent with the Act’s text and purpose as interpreted by the courts.” The Final Rule describes each factor as follows:
- Opportunity for Profit or Loss Depending on Managerial Skill. This factor considers whether the worker has opportunities for profit or loss based on managerial skill (including initiative or business acumen or judgment) that affect the worker’s economic success or failure in performing the work. The following facts, among others, can be relevant: whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space. If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee. Some decisions by a worker that can affect the amount of pay that a worker receives, such as the decision to work more hours or take more jobs when paid a fixed rate per hour or per job, generally do not reflect the exercise of managerial skill indicating independent contractor status under this factor.
- Investments by the worker and the potential employer. This factor considers whether any investments by a worker are capital or entrepreneurial in nature. Costs to a worker of tools and equipment to perform a specific job, costs of workers’ labor, and costs that the potential employer imposes unilaterally on the worker, for example, are not evidence of capital or entrepreneurial investment and indicate employee status. Investments that are capital or entrepreneurial in nature and thus indicate independent contractor status generally support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach. Additionally, the worker’s investments should be considered on a relative basis with the potential employer’s investments in its overall business. The worker’s investments need not be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of investments or the sizes of the worker and the potential employer. Instead, the focus should be on comparing the investments to determine whether the worker is making similar types of investments as the potential employer (even if on a smaller scale) to suggest that the worker is operating independently, which would indicate independent contractor status.
- Degree of permanence of the work relationship. This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers. This factor weighs in favor of the worker being an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities. This may include regularly occurring fixed periods of work, although the seasonal or temporary nature of work by itself would not necessarily indicate independent contractor classification. Where a lack of permanence is due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ, this factor is not necessarily indicative of independent contractor status unless the worker is exercising their own independent business initiative.
- Nature and degree of control. This factor considers the potential employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship. 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, facts relevant to the potential employer’s control over the worker include 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. More indicia of control by the potential employer favors employee status; more indicia of control by the worker favors independent contractor status.
- Extent to which the work performed is an integral part of the potential employer’s business. This factor considers whether the work performed is an integral part of the potential employer's business. This factor does not depend on whether any individual worker in particular is an integral part of the business, but rather whether the function they perform is an integral part of the business. This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the potential employer’s principal business. This factor weighs in favor of the worker being an independent contractor when the work they perform is not critical, necessary, or central to the potential employer’s principal business.
- Skill and initiative. This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work. Where the worker brings specialized skills to the work relationship, this fact is not itself indicative of independent contractor status because both employees and independent contractors may be skilled workers. It is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.
Under the Final Rule, 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 employer for work.
Although the Final Rule is scheduled to go into effect on March 11, 2024, legal challenges are expected that may impact that date. Notably, Senator Bill Cassidy announced that he plans to introduce a Congressional Review Act resolution to repeal the Final Rule. But even if that resolution is passed by Congress, President Biden is expected to veto any such legislation.