New Rule affects Classification of Independent Contractors

If you hire freelancers or independent contractors, you should be aware that the U.S. Department of Labor recently issued the Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act.

Effective March 11, 2024, this final rule revises the Department’s guidance on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA). Specifically, the final rule rescinds the 2021 Independent Contractor Rule, and replaces it with the long-standing “economic reality” test, which relies on the totality of the circumstances, where no one factor is determinative.

In essence, it’s harder to designate a worker as an independent contractor under the Final Rule. Here is a brief overview of some of the analysis an employer needs to apply to determine if a worker should be considered an independent contractor:

• This final rule continues to affirm that a worker is not an independent contractor if they are, as matter of economic reality, economically dependent on an employer for work.
• The final rule applies the following six factors to analyze employee or independent contractor status under the FLSA:
  (1) opportunity for profit or loss depending on managerial skill;
  (2) investments by the worker and the potential employer;
  (3) degree of permanence of the work relationship;
  (4) nature and degree of control;
  (5) extent to which the work performed is an integral part of the potential employer’s business; and
  (6) skill and initiative.

The final rule provides detailed guidance regarding the application of each of these six factors. No factor or set of factors among this list of six has a predetermined weight, and additional factors may be relevant if such factors in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work (i.e., an employee under the FLSA). In addition, the final rule has no effect on other laws or agencies (like the Internal Revenue Code of the IRS) that use different standards for employee classification.

This new legislation will require businesses to assess their current Independent Contractors and apply the new rules. If you have any questions or are interested in learning more, visit the FAQ section on the Final Rule on the Department of Labor website.