Department of Labor Issues New Rule on independent Contractor Classification 

The U.S. Department of Labor (DOL) recently announced a Final Rule concerning the classification of workers as employees or independent contractors under the Fair Labor Standards Act (FLSA). 

The agency’s prior 2021 Independent Contractor Rule set forth five economic reality factors to consider when classifying a worker as either an employee or an independent contractor under the FLSA: 1) the nature and degree of control over the work; 2) the worker’s opportunity for profit or loss; 3) the amount of skill required for the work; 4) the degree of permanence of the working relationship; and 5) whether the work is part of an integrated unit of production.  The first two factors were considered to be the test’s “core factors” and were typically most probative to the final determination.

Under the DOL’s new rule, the inquiry into whether a worker is an employee or independent contractor will involve six economic reality factors: 1) the worker’s opportunity for profit or loss depending on managerial skill; 2) investments by the worker and the employer; 3) the degree of permanence of the work relationship; 4) the nature and degree of control; 5) the extent to which the work performed is an integral part of the employer’s business; and 6) the worker’s skill and initiative.  None of the factors are “core” factors, and the test instead looks to the overall totality-of-the-circumstances.

The factor regarding investments by the worker and the employer is the biggest addition to the factors considered under the prior rule.  This factor considers whether the worker has made investments that are capital or entrepreneurial in nature and thus indicative of independent-contractor status.  This would include investments that generally support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach.

The Rule goes into effect on March 11, 2024, and replaces the agency’s 2021 Independent Contractor Rule.