On January 10, 2024, the U.S. Department of Labor (“DOL”) published its final rule on Employee or Independent Contractor Classification under the Fair Labor Standards Act (“FLSA”). Crowell & Moring previously reported on the proposed rule announced on October 11, 2022. The final rule rescinds the “core factors” independent contractor rule adopted by the Trump administration in 2021 and returns to a “totality of the circumstances” analysis for determining whether a worker is properly classified as an employee or independent contractor. According to the DOL, the new final rule institutes an analysis that better aligns with judicial precedent and the FLSA’s text and purpose. The final rule goes into effect on March 11, 2024.
After approximately 55,400 comments on the proposed rule, the DOL issued a final rule that mirrors the proposed rule with a few points of clarification and new language. In particular, the DOL adjusted the proposed regulations with regard to the managerial skill and control factors. The final rule establishes an “economic realities” test, including the following six non-exhaustive factors with no factor or factors being dispositive:
- 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 that affect the worker’s economic success or failure in performing the work. The emphasis on “opportunities” replaces the now-deleted reference in the proposed rule to whether the worker “exercises” managerial skill. The DOL thereby broadened the scope of this factor to account for facts relevant to a worker’s profit or loss and managerial skill. Managerial skills in this factor include initiative or business acumen or judgment. Relevant facts when considering this factor include, but are not limited to whether the worker: (i) determines or can meaningfully negotiate the charge or pay for the work provided; (ii) accepts or declines jobs or chooses the order and/or time in which the jobs are performed; (iii) engages in marketing, advertising, or other efforts to expand their business or secure more work; and (iv) makes decisions to hire others, purchase materials and equipment, and/or rent space.
- Investments by the Worker and the Potential Employer
This factor considers whether any investments by a worker are capital or entrepreneurial in nature. The rule clarifies that factors such as costs borne by a worker for tools and equipment to perform a specific job, costs of the worker’s labor, and costs that the potential employers impose unilaterally on the worker are not evidence of capital or entrepreneurial investment and instead indicate the employee’s status. Investments that are capital or entrepreneurial in nature, however, like increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach indicate independent contractor status because such investments generally support an independent business and serve a business-like function. Like the proposed rule, the final rule instructs that a worker’s investments should be considered on a relative basis with the potential employer’s investments in its overall business. 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, indicating 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. Conversely, this factor weighs in favor of independent contractor status when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themselves and marketing their services or labor to multiple entities. This factor may include regularly occurring fixed periods of work, however, the seasonal or temporary nature of work by itself would not necessarily indicate independent contractor status. In situations where lack of permanence is due to operational characteristics that are unique to particular industries or businesses, this factor does not necessarily indicate independent contractor status unless the worker is exercising their own independent business initiative.
- Nature and Degree of Control
This factor considers the employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship. When evaluating the potential employer’s degree of control over the worker, the following facts should be considered: (i) 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; (ii) 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 the worker, or places demands or restrictions on the worker that do not allow them to work for others or work when they choose; and (iii) whether the potential employer controls economic aspects of the working relationship, including control over prices or rates for services and the marketing of the services or products provided by the worker. Actions taken by the potential employer for the sole purpose of complying with a specific, applicable Federal, State, Tribal, or local law or regulation are not indicative of control. Actions taken by the potential employer that go beyond statutory or regulatory compliance and instead serve its own compliance methods, safety, quality control, or contractual or customer service standards may be indicative of control. Essentially, more indicia of control by the potential employer favors employee status whereas 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 departs from the proposed rule which focused on whether the “individual worker is an integral part of the business.” Instead, the final rule depends on whether the function the individual performs is an integral part of the business. This factor weighs in favor of employee status when the work performed is critical, necessary, or central to the potential employer’s principal business but weighs in favor of independent contractor status when the work performed 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. 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, this factor indicates employee status. When the worker brings specialized skills to the work relationship, this fact is not itself indicative of independent contractor status because both an employee and an independent contractor may be a skilled worker. It is when the worker uses those specialized skills in connection with business-like initiative that independent contractor status is indicated.
- Additional factors
Additional factors may be relevant when determining whether a worker is an independent contractor under the FLSA. Specifically, other factors may be relevant if they in some way indicate whether the worker is in business for themselves as opposed to being economically dependent on the potential employer for work.
The determination of whether a worker is an employee or independent contractor is integral for businesses due to the many obligations accompanying employee status, such as possible overtime pay, benefits and withholding obligations. While the final rule realigns with case law, it may have a significant impact on industries like the gig-economy, which rely heavily on contract workers. Employers should ensure that all workers are correctly classified as employees or independent contractors under the final rule.
For further information, please contact:
Thomas P. Gies, Partner, Crowell & Moring