On January 10, 2024, the US Department of Labor (DOL) issued the “Final Rule” that modifies the standard for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The Final Rule will take effect on March 11, 2024.
Under the FLSA, all covered entities—businesses involved in interstate commerce with a gross volume of sales more than $500,000—must pay all “nonexempt employees” the federal minimum wage and overtime pay for all hours worked over 40 in a workweek. Additionally, covered entities must maintain certain records for all nonexempt employees, including records related to an employee’s personal information, hours worked and wages earned. These requirements do not apply to “independent contractors.”
What should be simple never is. The FLSA defines “employee” but does not define “independent contractor” or provide a standard for determining whether a worker is an independent contractor.
Courts stepped in to fill the FLSA’s gap and developed a six factor test to determine whether a worker is an independent contractor under the FLSA. The six factors are: (1) Opportunity for profit or loss depending on managerial skill, (2) investments by the worker and the potential employer, (3) degree of permanence of the work relationship, (4) nature and degree of control, (5) extent to which the work performed is an integral part of the potential employer’s business and (6) skill and initiative.
In 2021, the Trump Administration’s DOL issued the “2021 IC Rule,” which elevated the importance of two factors: “the nature and degree of the individual’s control over the work” and “the individual’s opportunity for profit or loss.” The 2021 IC Rule’s emphasis on these two factors made it easier for workers to be classified as independent contractors, particularly gig-workers, and thus not entitled to the FLSA’s protections.
Once the Biden Administration took office, the DOL delayed, and eventually rescinded, the 2021 IC Rule. On January 10, 2024, the DOL issued the Final Rule discussed here.
The Final Rule:
The Final Rule reverses the 2021 IC Rule and reinstitutes the traditional six factor test used by courts. The Final Rule sets forth the following six factors:
- Opportunity for profit or loss depending on managerial skill. This factor considers the following facts, among others: whether the worker determines or negotiates pay for the work; whether the worker accepts or declines jobs or chooses the order or time in which the jobs are performed; whether the worker engages in marketing, advertising or other efforts to secure more work; and whether the worker makes decisions to hire others, purchase materials or rent space. A “yes” for each suggests the worker is an independent contractor.
- Investments by the worker and the potential employer. This factor considers whether the worker makes investments. The DOL states, “if the worker is making similar types of investments as the employer or investments of the type that allow the worker to operate independently in the worker’s industry or field,” then that suggests the worker is an independent contractor.
- Degree of permanence of the work relationship. If the working relationship is definite in duration, non-exclusive, project based or sporadic, then that suggests the worker is an independent contractor—unless the lack of permanence is due to characteristics that are unique to the particular business or industry and the workers they employ.
- Nature and degree of control. This factor considers the employer’s control over the worker, which includes, in part, whether the employer sets the worker’s schedule, supervises the performance of the work or explicitly limits the worker’s ability to work for others. Less control over the worker suggests the worker is an independent contractor.
- Extent to which the work performed is an integral part of the potential employer’s business. This factor focuses on whether the work performed, not the individual worker, is important or “central” to the employer’s business. If the work performed is not important, necessary or central to the employer’s business, then this factor weighs in favor of the worker being an independent contractor. (Commentators note the Final Rule’s change to this factor means this factor will almost always weigh in favor of finding the worker is an employee.)
- Skill and initiative. This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. Importantly here, if the worker depends on the employer for training, that is indicative of employee status.
The DOL emphasized that all six factors must be applied equally, with no factor given more weight than others.
Impact on Businesses:
The Final Rule makes it harder to classify a worker as an independent contractor than it has been the previous three years. Accordingly, covered entities hiring gig workers, especially retailers hiring gig workers in the new retail-gig space, should consult with counsel to determine how the Final Rule affects its wage and hour and recording practices to avoid costly FLSA claims.