January 2024 Compliance News Article

Independent Contractor Final Regulations

The U.S. Department of Labor (DOL) issued final regulations for determining whether a worker is classified as an employee or independent contractor under the Fair Labor Standards Act (FLSA).

Background

Traditionally, the DOL and courts have applied an economic reality test to classify a worker as someone dependent on the employer (an employee) or someone in business for themselves (an independent contractor). This was commonly thought to be based on a totality-of-the-circumstances analysis which generally included an analysis of the opportunity for profit or loss, investment, permanency, control, skill and initiative, and whether the work was integral to the employer’s business.

Economic Reality Test

The DOL provided the following revised six factors in determining whether the economic realities of the working relationship and economic dependence categorized a worker as an employee or independent contractor. No one factor is intended to have a higher weighting than another and additional factors may be relevant.

Opportunity for profit or loss depending on managerial skill – Whether the worker engages in efforts to expand their business or secure more work, has an opportunity for profit or loss, or may accept or decline jobs are some facts that may be relevant.
Investments by the worker and the potential employer – The focus is whether the worker’s investments are similar to the employer’s (even on a smaller scale).
Degree of permanence of the work relationship – Whether the work relationship is indefinite or project based. A lack of permanence, though, is not always indicative of independent contractor status, so other factors should be considered.
Nature and degree of control – Whether the potential employer sets the worker’s schedule, supervises work performance, or explicitly limits the worker’s ability to work for others. Control over economic aspects should be considered, as well.
Extent to which the work performed is an integral part of the potential employer’s business – Whether the function the worker performs is critical, necessary, or central to the potential employer’s business.
Skill and initiative – Whether the worker uses specialized skills or is dependent on the employer for training.

Effective Date

The DOL is not imposing additional reporting or recordkeeping requirements for employers or independent contractors. This final regulation will be effective March 11, 2024.

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