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Yesterday, the U.S. Department of Labor (“DOL”) unveiled the details of a long-awaited final rule clarifying its guidance on determining whether a worker should be classified as an “employee” or “independent contractor” under the Fair Labor Standards Act (“FLSA”) (the “Final Rule”). The Final Rule takes effect March 11, 2024.
Why is This Final Rule Significant?
Under federal and state employment laws, employees are entitled to certain legal protections in the workplace. Independent contractors, however, are generally not entitled to these same protections. It is crucial for employers to accurately classify all workers or risk exposing themselves to costly lawsuits and penalties.
Brief History of the Independent Contractor Analysis
The FLSA does not explicitly define the term “independent contractor.” Accordingly, employers, courts, and employees have historically relied on case law and informal guidance from the DOL, much of which can be unclear. Not surprisingly, this has led to significant confusion and litigation. The DOL issued the Final Rule to provide official guidance and prevent further confusion.
Summary of the Final Rule
In short, the Final Rule establishes a six-factor test, which seeks to assess the “economic reality” of the relationship between a business and its worker. The six factors are:
- the worker’s opportunity for profit or loss;
- investments by the worker and potential employer;
- the degree of permanence of the relationship;
- the nature and degree of the potential employer’s control over the work;
- the extent to which the work is “integral” to the potential employer’s business; and
- the worker’s skill or initiative.
If, after analyzing the test’s factors, it is clear that the worker economically depends on the business for continued employment, then the worker should be classified as an employee. Conversely, if the worker does not economically rely on the business for continued employment but rather, operates as an independent business, then the worker can be classified as an independent contractor.
Notably, the DOL specifically emphasized that yesterday’s rule does not contain an “ABC worker classification test,” which is the test used by some states, including California, to differentiate between employees and independent contractors.
The DOL’s Final Rule is sure to have an impact on businesses across all industries as it is highly likely to result in an uptick of related litigation. Accordingly, it is critical for businesses with independent contractors to ensure that these workers are properly classified.
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