On January 10, 2024, the U.S. Department of Labor ("DOL") published a final rule that aims to guide employers in determining whether a worker is an employee or an independent contractor under the Fair Labor Standards Act. The rule will take effect on March 11, 2024. It supplants the 2021 Independent Contractor Rule in favor of a more flexible and balanced analysis of economic reality.

Background

Confusion has long permeated the analysis by both workers and companies of whether someone may be legally classified as an independent contractor or an employee. This uncertainty has only been exacerbated by the advent of the Gig Economy, when it seems like everyone is now an independent contractor or a consultant.

The law has been of little help. Under the Fair Labor Standards Act ("FLSA"), "employee" is murkily defined as "any individual employed by an employer." The term "independent contractor" is not defined by the FLSA at all, leading to confusion in practice by workers and those for whom they work. The new rule aims to better align the DOL's analysis with judicial determinations to reduce confusion, enhance compliance with the law, and better protect workers.

The New Rule

Earlier this year, the DOL published the Employee or Independent Contractor Classification Under the Fair Labor Standards Act rule (the "Rule") to offer clearer guidance in determining whether a worker is legally an employee or an independent contractor. The Rule was drafted with the goal of ensuring that workers are properly classified so that those who are legally employees are provided with benefits guaranteed to them under the law, such as minimum wage and overtime pay.

The Rule formalizes analysis of six factors, which must all be considered holistically, and no single factor weighs more heavily than another. The factors are:

  1. The worker's opportunity for profit or loss, depending on managerial skill
    • Someone who earns profits or suffers losses based on their own independent effort and decision making is more likely to be an independent contractor
  2. Relative degree of investment of cost by the worker and the employer
    • Someone who increases their own number of clients, reduces their own business costs, or increases their own sales is more likely to be an independent contractor
  3. Permanence of the work relationship
    • Someone with a continuous working relationship with the employer with no set end date is more likely to be an employee, especially if the job in question is the worker's only job
  4. Nature and degree of control by the employer of the terms and conditions of employment
    • If the employer controls hiring, firing, scheduling, pay rates, or closely supervises work, the person is more likely an employee
  5. Whether the work performed is integral to the employer's business
    • If the worker's performance is critical, necessary, or central to the principal business of the employer, they are more likely to be an employee, especially if they are performing work that the company exists to provide (e.g., a mover at a moving company)
  6. The worker's use of skill and initiative in performance of the work
    • If a worker uses a specialized skill in connection with a business initiative, they are more likely to be an independent contractor, whereas if they are directed in the specific manner in which they perform the work by the employer, they are more likely to be an employee

Additional factors may be considered if relevant to determining if the worker is in business for themself or if they are economically dependent on the employer.

Recommendations For Employers

The Rule is set to go into effect on March 11, 2024. However, the federal Rule is not the only consideration for employers when determining how to properly classify their workers. The IRS and many states have their own classification tests, such as so-called "ABC" tests, and their own lists of factors to consider in order to determine whether an individual is properly classified as an independent contractor.

Misclassification claims can be costly for employers, with workers alleging underpayment, unpaid overtime, eligibility for benefits, liquidated damages, and attorneys' fees. Neither issuing a 1099, nor having the worker form their own LLC, nor having an independent contractor agreement signed by the parties will necessarily win the day, as courts will evaluate the factors under the Rule or other applicable classification tests.

Worker classifications require a unique and nuanced analysis. Employers should undertake a thorough review of the actual (as opposed to written) job duties of anyone who they have classified as an independent contractor or consultant to ensure that workers are classified consistently with the new Rule and other applicable federal and state tests.

We are ready to assist you. Please contact an attorney in MSF's Employment Group if you have any questions regarding the new Rule or worker classifications.

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.