The Department of Labor’s final rule for employee or independent contractor classification under the Fair Labor Standards Act rescinds the 2021 Independent Contractor Rule, replacing it with guidance on analysis that’s more consistent with the FLSA as interpreted by longstanding judicial precedent, and was scheduled to take effect March 11, 2024.
The final rule reduces the risk of misclassification while providing greater consistency for businesses and gig workers, specifically:
- The designation of control and opportunity for profit or loss are given greater weight.
- Considering workers’ investments and initiative only as part of the opportunity for profit or loss.
- Prohibiting consideration of whether work performed is central or important to your business
A step toward greater clarification
The 2021 IC Rule narrowed the economic reality test: Is a worker economically dependent on the employer for work? This had a confusing and disruptive effect, departing from decades of case law and describing and applying the multifactor economic reality test as a totality-of-circumstances test.
Analysis of the final rule may be applied to workers in any industry and will be accessible in the Code of Federal Regulations. It doesn’t adopt an ABC test, permitting an independent contractor relationship only if all three factors in a three-factor test are satisfied. Instead, the multifactor economic reality test that courts use to determine whether a worker is an employee of an independent contractor is used, relying on the totality of the circumstances where no one factor is determinative.
The final rule revises only the DOL’s interpretation under the FLSA and has no effect on federal, state or local laws with different standards of classification. The IRS and National Labor Relations Act have different statutory language and judicial precedent governing the distinction between employees and independent contractors. The laws are interpreted and enforced by different federal agencies. The rule has no effect on state wage and hour laws that use the ABC test — California’s and New Jersey’s, for instance. The FLSA doesn’t preempt federal, state and local laws that apply.
In brief, according to new federal guidance, businesses should meet whichever standard provides workers with the greatest protection.
The key aspects
The final rule affirms that a worker is not an independent contractor if economically dependent on an employer for work, applying six factors:
- Opportunity for profit or loss depending on managerial skill.
- Investments by the worker and the potential employer.
- Degree of permanence of the work relationship.
- Nature and degree of control.
- Extent of the work performed as integral to the potential employer’s business.
- Skill and initiative.
Workers cannot voluntarily waive employee status, choosing to be classified as independent contractors. They cannot waive FLSA-protected rights like minimum wage or overtime pay. The Supreme Court has explained that waiving their FLSA rights would harm other employees, undermining the goal of eliminating unfair methods of competition in commerce.
Among the similarities to the 2021 rule: advice on definitions and on identifying economic dependence as the ultimate inquiry of the analysis, providing a nonexhaustive list of factors to assess economic dependence with no single factor being determinative. Both clarify that economic dependence doesn’t focus on the amount of income the worker earns or whether the worker has other sources of income.
Differences between the new rule and the 2021 rule:
- Returns to a totality-of-the-circumstances economic reality test, where no single factor or group of factors is assigned any predetermined weight.
- Provides additional analysis of the control factor, including how scheduling, supervising, price-setting and working for others are considered when analyzing the nature and degree of control over a worker.
- Returns to the DOL’s consideration of whether the work is integral to the employer’s business rather than exclusively part of an integrated unit of production.
- Omits a provision from the 2021 rule that minimized the relevance of an employer’s reserved but unexercised rights to control a worker.
Note that this is just a summary of a complex series of provisions. One thing certainly hasn’t changed between the new rules and the old: the need for companies to obtain qualified professional advice to make sure they are in compliance.