The United States Department of Labor (the “Department”) has published a final rule regarding the analysis of who constitutes an employee or independent contractor under the Fair Labor Standards Act (“FLSA”), which goes into effect on March 11, 2024 (the “Rule”). The Rule rescinds the Department’s 2021 rule titled “Independent Contractor Status Under the Fair Labor Standards Act” (the “2021 Rule”).
Background
Generally, the FLSA establishes standards for the treatment of employees, including wage requirements, overtime pay, recordkeeping, prohibitions against retaliation, and youth employment standards. The protections of the FLSA do not apply to independent contractors and its requirements only apply to “covered employers.” For more information on the FLSA, you can visit the Department’s website here.
The main inquiry in analyzing whether a worker is an employee or an independent contractor is one of economic dependence, which means that a worker is an independent contractor if that worker is in business for themselves as a matter of economic reality. The Rule provides six factors to be weighed in making that determination: (1) opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the potential employer; (3) the degree of permanence of the work relationship; (4) the nature and degree of control; (5) the extent to which the work performed is an integral part of the potential employer’s business; and (6) skill and initiative. As opposed to the 2021 Rule, which gave certain factors more weight than others, the Rule provides for a totality-of-the-circumstances analysis, which means that all factors are given full consideration.
Analysis of the Factors
Opportunity for profit or loss depending on managerial skill
The Rule provides that the following facts are relevant in analyzing this factor:
whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; 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 does not have an opportunity for a profit or loss dependent on managerial skill, then this factor would lean towards a finding that the worker is an employee.
Investments by the worker and the potential employer
The overarching inquiry under this factor is whether the worker’s investments are capital or entrepreneurial in nature. Investments that are capital or entrepreneurial in nature include investments that “support 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.”
The analysis under this factor includes determining whether the investments by the worker generally support an independent business, such as a worker supplying their own tools, renting space, and spending money on marketing their services. Facts such as these would weigh in favor of an independent contractor relationship because they allow the worker to do more work and find new clients.
The degree of permanence of the work relationship
The Rule provides that if the nature of the relationship between the worker and potential employee is “indefinite in duration, continuous, or exclusive of work for other employers,” then this factor will weigh in favor of the worker being an employer. However, this factor will generally weigh in favor of determining whether the worker is an independent contractor if the relationship is “definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themselves and marketing their services or labor to multiple entities.”
Nature of degree of control
The Rule provides the following facts to consider under this factor:
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 . . . 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. Whether the potential employer controls economic aspects of the working relationship . . . including control over prices or rates for services and the marketing of the services or products provided by the worker.
The more control exhibited by the potential employer, the more likely this factor will weigh in favor of a determination that the worker is an employee and the more control exhibited by the worker, the more likely this factor will weigh in favor of a determination that the worker is an independent contractor.
The extent to which the work performed is an integral part of the potential employer’s business
This factor hinges on whether the work performed by the worker is “critical, necessary, or central” to the principal business of the potential employer. If it is, this factor will weigh in favor of a finding that the worker is an employee, and if not, it will weigh in favor of a finding that the worker is an independent contractor.
Skill and initiative
If a worker does not utilize specialized skills in providing the services to the potential employer, this factor will weigh in favor of a finding of an employment relationship. However, merely utilizing specialized skills does not necessarily mean that this factor will weigh in favor of a finding of an independent contractor relationship. These specialized skills must contribute to “business-like initiative,” including marketing these skills to generate new business for the worker.
These factors are not an exhaustive list, and additional factors may be considered when analyzing whether a worker is an employee or independent contractor and determining whether the worker is protected under the FLSA.
What should Businesses do?
Businesses that rely on the services of independent contractors should review their relationships with current independent contractors and their policies and procedures going forward for new independent contractors, including a review of their independent contractor agreements, to ensure that their relationships with their workers are truly independent contractor relations.
Additional Resources
For more information regarding the Rule, businesses and workers can visit the Frequently Asked Questions and Small Entity Compliance Guide pages of the Department’s website. These helpful resources provide guidance regarding the new Rule, including examples of the factors addressed herein.