On January 10, 2024, the Department of Labor published a final rule which helps clarify the analysis of who is an employee versus an independent contractor under the Fair Labor Standards Act. The DOL intends for the new rule to reduce misclassification of individuals who should be employees and therefore eligible for certain FLSA protections.
The final rule clarifies that the determination of who should be classified as an independent versus employee is a multistep analysis and that no single factor is used to determine the correct classification. The final rule uses the economic reality test, which includes the following factors:
Opportunity for Profit or Loss Depending on Managerial Skill
The first factor is the opportunity for profit or loss for the individual. Relevant issues are the worker’s managerial skill, such as initiative, expertise and judgment. Facts that are reviewed under the factor 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.
If the facts do not show that a worker could incur a profit or loss, then the worker is more likely to be an employee.
Degree of Permanence of the Position
The second factor to consider is the degree of permanence of the position. If the duration of the relationship is indefinite, non-exclusive, and project-based or sporadic, based the relationship, they are more likely an independent contractor. If the worker performs services for multiple businesses and markets his services to various businesses that also weighs in favor of an independent contractor relationship.
Investments Made by the Worker and the Potential Employer
The third factor is the nature of any investments by the worker. Are they capital or entrepreneurial in nature, then the individual is more likely an independent contractor? The following facts are used to determine if the investments are capital or entrepreneurial:
- Do the investments support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach.
- Are the investments of the type that would allow the worker to operate independently in the industry or field without working for the business. Such investments weigh in favor of independent contractor status.
Nature and Degree of Control
This fourth factor is the control that the potential employer has over the performance of the work and the economic aspects of the relationship. Factors to review in determining control include the business control over setting the worker’s schedule, supervision of the performance of the work, any limitations on the worker’s ability to work for others, the ability to supervise or discipline the workers, or place any other restrictions on the worker. Also, the economic controls of the potential employer need to also be considered, including setting the prices or rates for services and the marketing of the services or products provided by the worker. The more control by the potential employer of the services provided by the worker the more likely the worker is an employee.
Extent to Which the Work is Performed is an Integral Part of the Potential Employer’s Business
The fifth factor is whether the services performed are an integral part of the potential employer’s business. If the worker is performing services that are critical, necessary, or central to the potential employer’s principal business, the worker is more likely an employee.
Skill and Initiative
The last factor is determining whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. A worker is more likely and independent contractor when the worker performs specialized skills for the potential employer. While some employees can have specialized skills the difference in an independent contractor is the worker’s use of those specialized skills in connection with his own business initiative.
All business should be looking at this multifactor test before classifying a worker as an independent contractor to avoid various penalties that may come with misclassification. A small entity compliance guide was issued. For more information see Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act, RIN 1235-AA43 | U.S. Department of Labor (dol.gov).
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