by Jacob M. Sitman, Brennen A. McCurdy
On January 10, 2024, the U.S. Department of Labor (“DOL”) announced the publication of its highly anticipated Final Rule regarding the test that should be applied to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act (“FLSA”). The Final Rule goes into effect on March 11, 2024. Employers should review their classifications of workers before the effective date to ensure that independent contractors are not improperly classified. Improper classification can lead to a significant legal cost and liability.
Are independent contractors covered by the FLSA?
The FLSA was enacted by Congress in 1938 to eliminate “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being for workers.” To accomplish this goal, the FLSA requires, among other things, covered employers to pay nonexempt employees at least the Federal minimum hourly wage (presently $7.25) for all hours worked, and overtime at one-half times the employee’s regular rate. However, this protection, along with other protections provided by the FLSA, do not apply to independent contractors.
The FLSA does not define the term “independent contractor.” However, the DOL recognizes that independent contractors are not employees for purposes of the FLSA because they “are not economically dependent” on the employer and “are in business for themselves.” Merely throwing an “independent contractor” label on a worker’s position or on an agreement with a worker does not make the worker an independent contractor.
Employee vs. independent contractor
Instead, the DOL has developed factors to consider in determining whether a worker is an employee economically dependent on the employer or, instead, an independent contractor in business for themselves. Frustratingly, the weight of these factors has varied under different tests adopted by the DOL over the years.
Before the adoption of the 2024 Rule, the DOL issued the 2021 Independent Contractor Rule under former President Donald Trump. The 2021 Rule was generally viewed as a business-friendly approach to the independent contractor standard – meaning that more workers would be considered independent contractors. Under the 2021 Rule, two “core” factors, namely, (1) the nature and degree of control over the relevant work and (2) an individual’s opportunity for profit or loss, were given more weight in the worker classification analysis. Three other factors were considered less probative. The 2021 Rule has not been superseded by the 2024 Rule.
What factors determine if a worker is an independent contractor?
The 2024 Rule abandons the two “core” factors approach in favor of a totality of circumstances approach wherein no one factor is given more weight. That totality of the circumstances approach reinstitutes the long-standing “economic realities” test originally established by the U.S. Supreme Court in Rutherford Food Corp v. McComb, 331 U.S. 722 (1947).
Under the DOL’s 2024 Rule, the six factors relevant to this approach now include:
- The opportunity for profit or loss depending on managerial skill;
- Investments by the worker and potential employer;
- The degree of permanence of the work relationship;
- The nature and degree of control over performance of the work and working relationship
- The extent to which the work performed is an integral part of the potential employer’s business; and
- The skill and initiative of the worker.
The 2024 Rule states that “additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA[.]” The DOL included this provision to emphasize that “the [above] enumerated factors are not to be applied mechanically but viewed along with any other relevant facts in light of whether they indicate economic dependence or independence.” The 2024 Rule is considered a pro-employee approach, and litigators expect that it will create an influx of legal claims and classification challenges once it goes into effect on March 11, 2024.
What does the 2024 Final Rule on independent contractors mean for businesses?
While the 2024 Rule is not binding legal authority, it will inevitably be cited by the DOL, worker advocates, and courts as persuasive authority for determining a worker’s status and eligibility for minimum wage and overtime pay under the FLSA. Ultimately, it is the role of the courts, and not regulatory bodies like the DOL, to create binding precedent. Therefore, to effectively manage legal risk, employers and their counsel should review their current worker classifications and determine whether their independent contractor agreements measure up to the requirements of the 2024 Rule.
In the meantime, Fitzpatrick Lentz & Bubba will continue to monitor and report on continuing developments in the area of worker and independent contractor classification. Please contact our Employment Law & Labor Relations practice with questions or concerns.