Final U.S. Department of Labor Rule Regarding Employee or Independent Contractor Classification
On January 10, 2023, the U.S. Department of Labor (“DOL”) published a final rule setting forth factors to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (“Rule”).
The Rule rescinds the 2021 Independent Contractor Rule and modifies the October 2022 proposed rule. The Rule adopts a six-factor test focused on the “economic reality” of the relationship between a potential employer and a worker. The test asks whether, as a matter of economic realities, the worker depends on the potential employer for continued employment or is operating an independent business.
This Rule adopts a new six-factor economic reality test to determine economic dependency:
1. The worker’s opportunity for profit or loss depending on managerial skill;
- This factor considers whether the worker has opportunities for profit or loss based on managerial skill (including initiative or business acumen or judgment) that affect the worker’s economic success or failure in performing the work. The following facts, among others, can be relevant: whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes 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.
2. Investments by the worker and potential employer;
- This factor considers whether any investments by a worker are capital or entrepreneurial in nature. Investments that are capital or entrepreneurial in nature and thus 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. Additionally, the worker’s investments should be considered on a relative basis with the potential employer’s investments in its overall business. The worker’s investments need not be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of investments or the sizes of the worker and the potential employer. Instead, the focus should be on comparing the investments to determine whether the worker is making similar types of investments as the potential employer (even if on a smaller scale) to suggest that the worker is operating independently, which would indicate independent contractor status.
3. The degree of permanence of the work relationship;
- This factor considers the permanence of the work relationship in determining whether the person is an employee or an independent contractor. The Rule looks at the periods of work, permanence, operational characteristics and whether the work relationship is nonexclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities. This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers.
4. The nature and degree of control;
- This factor considers the potential employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship. Facts relevant to the potential employer’s control over the worker include whether the potential employer sets the worker’s schedule, supervises the performance of the work, or explicitly limits the worker’s ability to work for others. Additionally, facts relevant to the potential employer’s control over the worker include whether the potential employer uses technological means to supervise the performance of the work (such as by means of a device or electronically), reserves the right to supervise or discipline workers, or places demands or restrictions on workers that do not allow them to work for others or work when they choose. If there is an indication of more control of the potential employer over the worker, then the factor weighs more favorably towards the worker being an employee.
5. The extent to which the work is an integral part of the potential employer’s business; and
- This factor considers whether the work performed is an integral part of the potential employer’s business. This factor does not depend on whether any individual worker in particular is an integral part of the business, but rather whether the function they perform is an integral part of the business. This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the potential employer’s principal business.
6. The worker’s skill or initiative.
- This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative (marketing themselves as a business). This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work. Where the worker brings specialized skills to the work relationship, this fact is not itself indicative of independent contractor status because both employees and independent contractors may be skilled workers. It is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.
These factors are not exhaustive. That is, other factors might be relevant in a given case. This Rule takes a “totality of the circumstances” approach.
This Rule is effective on March 11, 2024.
Please contact us with any questions or for assistance in implementing practical solutions to ensure compliance with applicable law.
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