DOL Issues Final FLSA Independent Contractor Rule, Returns to Six-Factor Economic Reality Test

January 16, 2024

The U.S. Department of Labor published a final rule Jan. 10, 2024, on distinguishing employees from independent contractors for purposes of minimum wage and overtime pay under the Fair Labor Standards Act (FLSA). The rule returns to a six-factor test that asks whether, as a matter of economic reality, a worker is economically dependent on the employer or is in business as an independent contractor.

The six factors are:

  1. Opportunity for profit or loss based on managerial skill.
  2. Investments by the worker and the potential employer.
  3. Degree of permanence of the relationship.
  4. Nature and degree of control.
  5. Extent to which the work performed is an integral part of the potential employer’s business.
  6. Skill and initiative.

No single factor is determinative; rather, the “totality of the circumstances” controls. Additional factors may be considered if they are relevant to the overall question of economic dependence.

The new rule replaces a prior regulation from the Trump administration in 2021. The previous five-factor test began with two “core” factors: the principal’s right to control and the worker’s opportunity for profit or loss. If those factors were inconclusive, the rule considered three “guideposts” — the relationship’s length or permanence, the worker’s special skills and the work’s integration into the principal’s operations.

The New Rule Is, in Some Ways, Positive for Businesses

The six-factor economic realities test is familiar in employment law. Courts have interpreted and applied it since the U.S. Supreme Court used it to determine employee status under the Social Security Act in a 1947 case called United States v. Silk. Courts have varied slightly in their articulations of the factors, but most decisions apply the Silk factors as guideposts.

Fortunately, this robust case law provides some guidance for businesses. Indeed, the DOL touts its new rule as “aligned with the Department’s decades-long approach … as well as with federal appellate case law and [as] more consistent with the Act’s text and purpose as interpreted by the courts.”

Businesses also may appreciate that the DOL recognizes that independent contractors “play an important role in the economy and are commonly referred to by different names, including independent contractor, self-employed, and freelancer.” The DOL insists that its new rule “is not intended to disrupt the businesses of independent contractors who are, as a matter of economic reality, in business for themselves.” The DOL could have chosen a rule even less favorable for businesses, such as the ABC test applied in California. And, the DOL has signaled that its early enforcement initiatives will be directed to low-income (i.e., minimum wage threshold) workers as well as the construction and healthcare industries.

DOL Modified Several Factors in Pro-Business Ways

Notably, in response to public comments, the DOL modified several factors. Perhaps the most important change is to factor four, the “nature and degree of control.” The DOL’s proposed rule stated that when a business exercises control to comply with other laws or regulations, that control indicates employee status. But the final rule provides that control necessary to comply with “specific” legal requirements does not necessarily indicate employee status. Businesses can comply with state, federal, tribal or local laws without affecting worker classification, but if the business goes beyond specific legal requirements for its own convenience, this additional control will affect the analysis.

The final rule also clarifies that the DOL will not compare worker and company investments on a dollar-for-dollar basis. Instead, it will examine the relative investments to determine whether the worker is making “similar types of investments” that “suggest the worker is operating independently.”

The final rule also specifies that investments “unilaterally imposed” by the business on the worker do not suggest independence. For example, if the business requires the worker to buy steel-toed boots, the cost does not make the worker more likely to be an independent contractor. Tools the worker buys on the worker’s own initiative may, presumably, suggest independence.

The final rule also provides that the worker’s ability to earn more by working more is not entrepreneurial opportunity “when [the worker] is paid a fixed rate per hour or per job.” When a worker is paid by another method, the ability to earn more by working more may, presumably, suggest that the worker is independent.

Finally, the rule provides that specialized skill alone does not indicate that the worker is economically independent. Both “employees and independent contractors may be specialized workers.” Whether the worker uses specialized skill “in connection with business-like initiative” is the relevant inquiry.

But, the New Test Is More Difficult to Satisfy and Lacks Certainty

It is clear, however, that the new rule is intended to narrow the scope of independent contractors from the prior rule. According to acting Secretary of Labor Julie Su in a press briefing on Jan. 8, “We’re making sure workers get the protections they need while also leveling the playing field for employers,” because when businesses misclassify workers, “it’s not fair to their law-abiding competitors.” Furthermore, businesses seeking certainty likely will not find it in the new rule. Cases and enforcement actions under the non-exhaustive, totality-of-the-circumstances multifactor test will continue to be highly fact-specific, leaving ample uncertainty in individual situations.

The rule is to take effect March 11, 2024, but legal challenges are expected in court and/or on Capitol Hill. A lawsuit over the DOL’s delay in implementing, and later withdrawing, the 2021 rule also remains pending and may become active again.

Recommendations for Businesses

The new rule provides an opportunity for businesses to review their independent contractor relationships for litigation and misclassification risks. A worker, or class of workers, found to be misclassified may recover damages for failure to pay minimum wage and/or overtime and for a variety of other alleged damages. Such litigation can be costly and disruptive. Businesses are encouraged to consider whether their independent contractors meet the revised test and change classification if necessary.

For additional information regarding the impact of these developments, contact the authors of this article or another member of the McGuireWoods labor and employment team.

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DOL’s New Independent Contractor Rule

February 6, 2024

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