On January 10, 2024, the Department of Labor (DOL) announced its final rule and guidance on how the DOL will analyze if a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The final rule, which becomes effective on March 11, 2024, will be published in Title 29, Chapter V of the Code of Federal Regulations parts 780, 788, and 795. This 2024 rule rescinds prior guidance from the DOL issued in 2021 and adopts a six-factor test to analyze the “economic reality” of the worker/business relationship.
Why the Change?
Prior to this rule, the DOL and courts would often apply different analyses to determine if a worker was an employee or an independent contractor. Prior to the 2021 guidance, the DOL did not have any concrete guidance on how to perform the analysis. Courts, however, had more than 70 years of case law to build upon decisions from two U.S. Supreme Court Cases: NLRB v. Hearst Publications, Inc., 322 U.S. 111 (1944) and United States v. Silk, 331 U.S. 704 (1947). When the Trump administration DOL issued its 2021 guidance, the DOL departed from the court’s multi-factor review, and gave elevated weight to “the nature and degree of the individual’s control over the work” and “the individual’s opportunity for profit or loss.”
The competing methods of analysis created unpredictability and difficulties for employers. The DOL could determine a worker was an independent contractor, but the same decision might not stand up if challenged in court under the FLSA.
Analysis Under the New Rule
Now that the DOL has issued a concrete rule, we may have some alignment as the analysis should become easier and more predictable. Like the courts, the DOL has adopted a six-factor economic realities test. Under the test, the following factors are considered:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the potential employer;
- Degree of permanence of the work relationship;
- Nature and degree of control;
- Extent to which the work performed is an integral part of the potential employer’s business; and
- Skill and initiative.
In total, no one factor is dispositive of the circumstances; the totality of the circumstances will determine whether the “economic reality” of the worker/employer relationship is that of an employee or independent contractor. That is not to say one factor cannot weigh heavily on the ultimate decision. As the DOL’s FAQ document states:
Different factors might be more or less important in different cases depending on the facts of each individual case. For example, a factor leaning strongly towards one classification outcome (employee or independent contractor status) could be more relevant in the overall analysis for a particular worker than a different factor which might be a closer call.
Moving Forward
I, for one, am pleased with the DOL’s decision to align itself with the courts. Harmonizing analysis is not only helpful to lawyers, but it also helps employers make the right decisions. This new rule has moved in that direction.