New York, N.Y. (January 17, 2024) - Employers around the country should take note of the recent release of the long anticipated new rule adopted by the U.S. Department of Labor (DOL) that describes the test to be utilized to determine whether an individual should be classified as an employee or independent contractor under the Fair Labor Standards Act.

While it remains to be seen how deferential the federal courts will be to this rule, the rules of the game are now fairly clear for matters that the DOL is investigating. And it appears fair to say that the DOL will lean in favor of finding an employment relationship in the majority of contested matters. The new rule takes effect on March 11, 2024.

This rule was first proposed in October 2022 and, after receiving extensive public comments, the DOL has now issued a final version. The rule provides a six factor balancing test, but also notes that the determination of an individual's status should turn on the economic realities of the relationship; i.e., "whether the worker is either economically dependent on the potential employer for work or in business for themselves." Broadly speaking, if the latter they are an independent contractor and if the former they are an employee. The DOL will continue to look at the totality of the circumstances to determine the worker's status. The courts have traditionally used an economic realities test, focused on whether the worker is economically dependent on the business to which service is being rendered or is in business for themselves, while looking at the totality of the circumstances. Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947); see, e.g., Donovan v. DialAmerica Marketing, Inc., 757 F.2d 1376 (3d Cir. 1985) (evaluating the totality of the circumstances and focusing on six factors to determine whether a worker is an employee).

The six factors that the DOL will weigh are as follows:

  • The opportunity for profit or loss depending on managerial skill
  • Any investment by the workers and the potential employer
  • The degree of permanence of the relationship
  • The nature and degree of the "employer's" control
  • The extent to which the work performed is an integral part of the potential employer's business
  • The skill and initiative involved

The DOL's rule includes commentary about each of these factors, which explain how each is to be evaluated. That commentary is briefly discussed below.

Factor 1: The facts potentially relevant to determining whether there is an opportunity for profit or loss are whether the worker: determines or can meaningfully negotiate the amount of compensation for their work; accepts or declines jobs or chooses the order and/or time for performing the jobs; engages in marketing, advertising or other efforts to expand their business and secure additional work; and makes decisions to hire others, purchase materials and equipment, and/or rent space.

Factor 2: Investment by the worker and "employer" requires evaluation of whether the worker's investments are capital or entrepreneurial in nature. It is appropriate to consider the worker and potential employer's relative investments, including whether the worker makes types of investments that are similar the employer's investments.

Factor 3: The evaluation of degree or permanence will favor finding employment status if the work is indefinite in duration, continuous, or exclusive of work for other employers. If the work is of definite duration, non-exclusive, project-based or sporadic because the worker is in business for themselves and markets their services to multiple entities, independent contractor status is indicated.

Factor 4: The control factor encompasses both the business' active control and reserved control, which is the right to control the worker. The DOL will examine, among other factors, whether the "employer": sets schedules; supervises or reserves the right to supervise the work or discipline the worker; uses technological means of supervision; and controls the prices or rates paid for services and marketing of the services. Note that actions for the purpose of compliance with applicable law will not be deemed indicative of control, but actions that go beyond compliance may indicate control.

Factor 5: The key to assessing integrality to the business turns on whether the worker's function is an integral part of the business, not whether a particular worker is integral.

Factor 6: This factor turns on whether the worker uses specialized skills and whether the skills contribute to "business-like initiative." If the entity has to train the worker to perform the work, that suggests employee status.

Employers should bear in mind that, in this area, as in most areas of the law involving employer-employee issues, state and local laws need to be considered, as they may have different tests and require assessment of different factors. Given that consideration, as well as the differences in how courts in various jurisdictions may interpret the law and how much deference will be given to the DOL's analysis, evaluating whether it is proper to classify workers as independent contractors calls for careful, individualized analysis, ideally in consultation with experienced employment counsel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.