Rescinding a prior 2021 rule, the U.S. Department of Labor has now issued a long-anticipated rule redefining “independent contractor” for purposes of the Department’s interpretation of the Fair Labor Standards Act (FLSA). The FLSA mandates minimum wage and overtime pay, among other legal requirements. Acting Secretary of Labor, Julie Su, who was just renominated by President Biden to the Secretary of Labor post, issued a statement explaining that the rule is intended to address misclassification of employees as independent contractors, which the Department of Labor called a “serious problem that impacts workers’ rights to minimum wage and overtime pay, [and] facilitates wage theft.”
The prior 2021 rule, under former President Trump’s administration, focused on two factors—control and opportunity for profit or loss—for determining whether a worker was properly characterized as an “independent contractor.” This 2021 rule is now rescinded.
What Does the New Rule Say?
The new rule, which takes effect March 11, 2024, reverts back to a previously-used multifactor “economic reality” analysis. The new rule considers six factors for determining the “economic reality” of whether a worker is an employee or independent contractor. The Department of Labor expressly states that no one factor is determinative. Rather, all six factors will be considered and weighed to determine whether a worker is economically dependent on a potential employer for work, thus making the worker an employee for FLSA purposes. The six factors are:
- Opportunity for profit or loss depending on the worker’s managerial skill, such as through negotiating the worker’s price/fee, the worker’s ability to accept or decline jobs from the potential employer, the worker’s engaging in marketing and advertising efforts for the worker, and whether the worker can hire others or lease/purchase office space and equipment;
- Investments by the worker and the potential employer, such as the worker making investments to grow the worker’s own business or skillset;
- Degree of permanence of the work relationship, including whether the relationship is continuous, the duration is indefinite, or the relationship is exclusive for the potential employer;
- Nature and degree of control [of the worker’s work] such as work scheduling, supervision rights or reservation of such rights (excluding mandatory compliance with applicable federal, state, tribal, and local laws), mandatory trainings beyond those required for relevant licensing, price-setting, and ability to work for others;
- Extent to which the work performed is an integral part of the potential employer’s business; and
- Worker’s use of the worker’s own specialized skill combined with business-like initiative of the worker.
The Department of Labor also states that additional factors may be relevant and therefore may be used by the Department to determine whether the worker is “in business for themself” in order to be found an independent contractor, or whether the worker is economically dependent on the potential employer for work in order to be found an employee for FLSA purposes. The Department of Labor does not identify these “additional factors,” and any such additional factors must be considered on a case-by-case basis.
What Does This Mean for Employers?
First and foremost, employers must be aware that no one factor of the above-referenced six factors is determinative for “independent contractor” status. This means that even if a worker rents their own office space elsewhere and does not work at the employer’s worksite, this factor alone will not be sufficient to support a worker being an independent contractor. Employers should also be aware that other tests are used by different federal and state government agencies for determining whether a worker is an independent contractor, including for compliance with federal and state anti-discrimination laws.
Employers should review all existing independent contractor arrangements and agreements to ensure that workers are properly categorized as independent contractors under this new rule. The new rule takes effect March 11, 2024. Employers should expect increased focus by government agencies as well as plaintiff lawyers on the issue of miscategorization of workers as independent contractors for the coming year or longer.
Employers that miscategorize workers as independent contractors face potential government agency actions or individual employee or class action lawsuits for the miscategorization. Damages for such miscategorization could include government agency fees and penalties, mandatory back payment of minimum wage and overtime pay, plus attorney fees and possible punitive/exemplary damages.
Employers should be aware that workers are not permitted to declare themselves to be independent contractors. Workers often make such requests to avoid paying payroll taxes. Thus, even if a worker requests to be treated as an independent contractor, the U.S. Department of Labor and state agencies may nevertheless consider the worker to be an employee for FLSA and other purposes.
Should employers have questions regarding application of this new rule to specific worker situations, employment law counsel should be consulted.
The legal issues impacting this topic are and will continue to be ever-changing (Employment Law in Motion!), and since publication of this blog post, new or additional information not referenced in this blog post may be available.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.