The U.S. Department of Labor issues “new” set of rules to determine independent contractor vs. employee status under the Federal Fair Labor Standards Act.
A New DOL Independent Contractor Rule (Just Like The Old Rule).
By Andrew Houlding, Esq.
The U.S. Department of Labor (USDOL) recently issued a “new” set of rules to determine independent contractor vs. employee status under the Federal Fair Labor Standards Act (FLSA) that reverts to the “totality of the circumstances” test that was in effect until three years ago.
The “new” rule takes effect March 8, 2024, and replaces the “final” rule that was adopted March 8, 2021. The 2021 rules were intended to be more employer-friendly; the 2024 rules bend more clearly toward finding an employment relationship. But the changes aren’t radical, and the federal courts, which will primarily adjudicate FLSA claims, will rely primarily on established precedents in determining who should be classified as an employee.
It’s certainly a good moment for companies to review any independent contractor relationships they currently have, and to seek guidance on whether their “contractors” would now be considered employees if challenged.
Misclassification of employees as independent contractors is a significant focus of enforcement by the USDOL and private litigation on behalf of employees. Employees who are improperly classified and paid as independent contractors can win substantial back pay awards. And, if they win, they can collect double damages plus legal fees that can exceed the value of the wage claims.
The 2024 rules establish a six-factor test for employee status, and the DOL guidance provides that none of the six factors is given substantial weight over any other. If, as a matter of economic reality (rather than any written or oral agreements, individual preferences or titles), the relationship between entity and individual constitutes “employment” as defined under the FLSA, then the individual is entitled to all of the protections afforded under the FLSA, such as minimum wages and, most importantly, overtime. And, while other federal and state statutes may have different definitions of employer and employee, a determination that an individual is an employee under the FLSA likely will lead to the conclusion that the individual qualifies for employee status under a host of statutes and the common-law. Those statutes allow for claims of discrimination and benefits—such as unemployment compensation and Family and Medical Leave Act job protection.
The new “final rule” takes up 105 pages of The Federal Register. The “Small Entity Compliance Guide” on the USDOL website is a lot more manageable, and can be found at: https://www.dol.gov/agencies/whd/government-contracts/small-entity-compliance-guide#sixFactors.
Here’s a brief summary of the six factors:
- Risk: Does the worker:
- have opportunities for profit or loss based on managerial skill that affect the worker's economic success or failure?
- accept or decline jobs or choose the order and/or time in which the jobs are performed?
- engage in marketing, advertising, or other efforts to expand their business or secure more work?
- make decisions to hire others, purchase materials and equipment, and/or rent space.
If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee.
- Capital Investment. Are any investments by a worker capital or entrepreneurial in nature?
- Investments that are capital or entrepreneurial in nature and indicate independent contractor status generally support an independent business and serve a business-like function, such as increasing the worker's ability to do different types of or more work, reducing costs, or extending market reach.
- Is the work relationship indefinite in duration, continuous, or exclusive of work for other employers? That would weigh in favor of the worker being an employee. If the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple businesses, that would weigh in favor of the worker being an independent contractor.
- Does the company/entity have control, including reserved control over the performance of the work and the economic aspects of the working relationship? Reserved control means the employer has the right to control even if they do not actually exercise the control, i.e., an employer that reserves the right to discipline a worker for declining assignments likely leads to a finding of employer status.
- Is the work performed an integral part of the potential employer's business? If the work performed by a worker is critical, necessary, or central to the potential employer's principal business, then this factor indicates that the worker is likely an employee.
- Special Skills. Does the worker use specialized skills to perform the work and do those skills contribute to business-like initiative? If the worker brings specialized skills to the work relationship and uses those specialized skills in connection with business-like initiative, this may support independent contractor status.
The foregoing is intended as a brief introduction to the issue of employment/independent contractor status. It does not constitute legal advice. If you have concerns whether work relationships are correctly classified under the FLSA, please contact legal counsel.
For further information and to discuss independent contractor vs. employee issues, or any other employment law questions, contact Andrew Houlding (email@example.com); Chris Brigham (firstname.lastname@example.org), (Chair of the UKS Employment Practice Group); Valerie Ferdon (email@example.com); or Cristina Salamone (firstname.lastname@example.org).