U.S. Department of Labor Issued its Final Rule on Classifying Workers as Employees or Independent Contractors

Earlier this week, the United States Department of Labor (DOL) issued a "final rule" providing guidance on the proper classification of employees and independent contractors under the Fair Labor Standards Act (FLSA).

The final rule goes into effect on March 11, 2024, effectively rescinding the 2021 Independent Contractor Rule and creating a new standard for determining whether a worker is an employee or independent contractor for purposes of the FLSA.

Changes Under the Final Rule

The DOL says that the final rule more closely aligns with the FLSA and will reduce the risk of employees being "misclassified" as independent contractors. Both the final rule and the 2021 Independent Contractor Rule advise that independent contractors are workers who, as a matter of economic reality, are in business for themselves, while FLSA-protected employees are workers who, as a matter of economic reality, are economically dependent on an employer for work.

However, while the 2021 Independent Contractor Rule focused on two "core" factors, including the nature and degree of control over the relevant work and an individual's opportunity for profit or loss, the final rule returns to a "totality of the circumstances" standard and contemplates the following six non-exhaustive factors:

1. a worker's opportunity for profit or loss;
2. investments made by the worker and the potential employer;
3. the degree of permanence of the work relationship;
4. the degree of control an employer has over the work;
5. the extent to which work performed is integral to the employer's business; and
6. the use of a worker's skill and initiative.

The final rule provides additional analysis of the "control" factor, stating that scheduling, supervision, price-setting, and the ability to work for others must be considered when analyzing the nature and degree of control over the work.

In addition to de-prioritizing any "core" factor above another, the final rule clarifies certain factors. For example, the DOL advises that the "the extent to which work performed is integral to the employer's business" factor means whether the function the worker performs is an integral part of the business, not whether any individual worker in particular is an integral part of the business.

It is important to note that the final rule applies only to federal FLSA claims and does not impact states, such as California and New Jersey, that use an "ABC" test to assess worker classification.

Next Steps for Employers

• Beginning March 11, 2024, employers should be more careful in analyzing each of the final rule factors according to the totality of the circumstances to classify their workers and should no longer rely on control and opportunity for profit or loss as "core factors."
• Employers should be mindful to analyze final rule factors during the hiring stage and throughout employment to ensure, for example, that an independent contractor has not shifted to employee status.
• It is unclear how much deference courts will give to the new standard, but employers should seek legal assistance to assess compliance under the final rule.