Employee or Independent Contractor? A Guide to the New Rule

The U.S. Department of Labor (DOL) published a final rule on January 10, 2024, significantly revising its guidance on the classification of workers under the Fair Labor Standards Act (FLSA) as either employees or independent contractors, which took effect on March 11, 2024. This rule aims to provide clearer analysis for determining a worker’s classification and is designed to be more aligned with long-standing judicial precedents. The objective is to mitigate the risk of misclassifying employees as independent contractors, which can deprive workers of minimum wage, overtime pay, and other FLSA protections, while also offering a consistent framework for businesses engaging individuals who operate independently​​.

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.

Per the DOL, 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).

The background and motivation for this update stem from the original intentions of the FLSA, which was enacted in 1938 to establish critical worker protections. The misclassification of employees as independent contractors has been a persistent challenge, leading to situations where workers might not receive rightful employment benefits, including overtime pay, workers’ compensation insurance, employment taxes, and benefits costs. This misclassification also affects organizational obligations and flexibility in workforce management. The DOL emphasizes that the classification of independent contractors should be narrow under FLSA interpretation to prevent circumvention of employment laws​​.

The introduction of this rule reflects the DOL’s commitment to ensuring that labor laws are appropriately applied to protect workers while also providing clear guidance for employers. By revising the classification guidance, the DOL intends to address and reduce the incidences of misclassification, ensuring that workers are correctly categorized and thereby receive the protections and benefits to which they are entitled under the law​​.

For more detailed information on the new rule and its implications, you can visit the U.S. Department of Labor’s website and other legal analyses provided by labor and employment law experts.