U.S. Department of Labor Releases New Independent Contractor Final Rule

Feb 13, 2024

Paul Kramer

Director of Compliance

Distinguishing between employees and independent contractors is vital for employers. The federal Fair Labor Standards Act (FLSA), for example, requires employers to pay a guaranteed minimum wage and overtime compensation to employees, but this does not extend to independent contractors. Despite the importance of this business relationship distinction, many employers may still find it challenging to determine whether certain workers should be classified as an employee or independent contractor under the FLSA.

On January 10, 2024, the United States Department of Labor (DOL) attempted to alleviate this confusion by releasing its long-anticipated independent contractor final rule, effective March 11, 2024. The new final rule, however, brings more workers under the FLSA’s protection by making it more difficult for employers to establish independent contractor status.

The rule specifies a six-factor totality-of-circumstances test to assess whether a worker is an employee or independent contractor, with no single factor controlling. Employers should use these factors to determine whether they need to make additional provisions for contract workers under FLSA guidelines.

6 Factors for Employers to Assess if FLSA Applies to Contract Workers

The Worker's Opportunity for Profit or Loss.

This factor looks at whether the worker has opportunities for profit or loss based on their managerial skill such as initiative, business acumen, or judgment. If a worker has this opportunity for profit or loss, such as determining or negotiating the pay or charge for the work performed, it suggests independent contractor status.

Investments by the Worker and Employer.

Capital or entrepreneurial investments by workers, like those made by employers, reflect independent contractor status. Although the final rule is somewhat unclear as to what constitutes a capital or entrepreneurial investment.

Investments that do not fall into these categories include:

Purchasing tools and equipment to perform a job
The costs of a worker’s labor
Costs the employer unilaterally imposes on the worker

Permanence of the Working Relationship Between the Worker and the Employer.

The more permanent, continuous, and exclusive the working relationship, the more likely the worker is an employee. Nevertheless, a non-permanent and non-continuous relationship caused by characteristics pertaining to a particular business or industry does not necessarily indicate the worker is an independent contractor unless the worker exercises independent business initiative.

Nature and Degree of Control Over the Working Relationship.

The more control, or right to control, an employer has over the working relationship the more likely the worker is an employee. For example, does the employer set the worker’s daily schedule, closely supervise the work, discipline the worker, set the prices charged by the worker’s daily schedule, limit the worker’s ability to work for others, or exercise other means of control over the relationship.

Importance of Worker to an Employer's Business.

The extent to which the work performed is considered integral to the employer’s business can influence how that worker is classified under FLSA. If the services provided by the worker are critical, necessary, or central to the employer’s principal business, this factor favors employee status.

The Worker's Skill and Initiative.

If the worker utilizes specialized skills to perform the job and those skills contribute to a business-related initiative, it supports independent contractor status. On the other hand, if the worker does not use special skills and relies on the employer for training to do the job, an employment relationship is suggested.

To ensure compliance with the new final rule and avoid liability, employers should closely scrutinize the classification of their independent contractors consistent with the six-factor test. Employers should also maintain any agreements and communications with their contractors as they can be a valuable resource to show compliance with the final rule. And finally, due to the complexity and occasional vagueness of the final rule, employers should consider consulting with an experienced legal counsel for guidance if needed.