On March 11, 2024, the Department of Labor’s (DOL) new rule on the standard for determining who is an employee and who is an independent contractor under the Fair Labor Standards Act (FLSA) is set to take effect.
The rule – originally proposed in October 2022 – features a six-factor test “based on the economic reality of the worker and potential employer relationship,” the agency said, and affirms that a worker is not an independent contractor if they are economically dependent on an employer for work.
To analyze employee or independent contractor status under the FLSA, the six factors considered are:
- Opportunity for profit or loss depending on managerial skill. Facts that can be relevant include 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, the DOL said.
- Investments by the worker and the potential employer. Are any investments by a worker capital or entrepreneurial in nature? Costs to a worker – for tools and equipment to perform a specific job, the costs of labor and costs that the potential employer imposes unilaterally on the worker – indicate employee status. Alternatively, investments such as extending market reach or reducing costs would signal an independent business.
- Degree of permanence of the work relationship. 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 employee. Facts that tip the scales in favor of an independent contractor relationship: when the work is definite in duration, non-exclusive, project-based or sporadic based on the worker being in business for him or herself and marketing their services or labor to multiple entities.
- Nature and degree of control. To analyze this factor, facts such as 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 are all relevant, as well as whether the potential employer uses technological means to supervise the performance of the work, 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. More control by the potential employer favors employee status, the agency said, including reserved control, while more control by the worker favors independent contractor status.
- Extent to which the work performed is an integral part of the potential employer’s business. The DOL explained that this factor weighs in favor of employee status when the work performed is critical, necessary or central to the potential employer’s principal business and indicates independent contractor status when the work is not critical, necessary or central to the potential employer’s principal business.
- Skill and initiative. If the worker uses specialized skills to perform the work and combines them with business-like initiative, this factor tends to favor an independent contractor relationship. 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, then this factor indicates employee status.
None of the factors has a predetermined weight, the DOL said, and no single factor automatically determines a worker’s status as either an independent contractor or an employee. Instead, the factors are all weighed for a totality of the circumstances test.
Additional factors may be relevant if they in some way indicate whether the worker is in business for him or herself as opposed to being economically dependent on the employer for work.
To read the final rule, click here.
Why it matters
While the new rule is scheduled to take effect in the coming weeks, it is already being challenged. A group of freelance writers and editors filed a lawsuit in Georgia federal court, arguing that the rule forces them into unwanted employment relationships. Employers should review the new DOL guidance, along with any applicable state or local laws governing classification before retaining a worker as an independent contractor.