US Department of Labor Narrows Definition of “Independent Contractor”

Employment Law

Noah P. Hill | March 26, 2024

On January 9, 2024, the U.S. Department of Labor (DOL) announced a six-factor test for determining whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The new rule takes effect on March 11, 2024, and rescinds the Independent Contractor Status under the Fair Labor Standards Act rule (2021 IC Rule). The six-factor test asks whether, as a matter of economic reality, a worker is dependent on the employer or is in business as an independent contractor.

The six factors are:

  1. Opportunity for profit or loss based on managerial skill. Does the worker have the opportunity for profit or loss based on their own business judgment?
  2. Investments by the worker and the potential employer. Is the worker making capital or entrepreneurial investments in their work?
  3. Degree of permanence of the relationship. Is the working relationship indefinite, continuous, or exclusive of work for other employers?
  4. Nature and degree of control. Does the employer have control, including reserved control, over the work and how it is performed?
  5. Extent to which the work performed is an integral part of the potential employer’s business. Is the work being done integral to the employer’s business?
  6. Skill and initiative. Does the worker possess special skills or rely on training from the employer?

Unlike the prior rule, which had emphasized two core factors (the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss), no one factor in the new rule is intended to be weighed more heavily than another when analyzing whether a worker is properly classified. The economic reality test set forth by the final rule focuses more broadly on a worker’s economic dependence on an employer, considering the totality of the circumstances.

Impacts for Employers and Employees

The practical result of the final rule is that many workers – including workers who want to be independent contractors – are now more likely to be classified as employees under the FLSA. The increased number of factors and lack of any controlling factors will increase the ambiguity and variability in determining employment status. Understanding the impact of the final rule is critical for all employers, as workers cannot voluntarily waive or self-select their employment status under the FLSA.

Consequences of misclassification

Misclassifying employees as contractors can impose significant costs – including unpaid minimum wages and overtime, liquidated damages, and civil penalties. As such, employers may consider reviewing their independent contractors, including reviewing independent contractor agreements and work descriptions to correct any misclassifications. Employers also should ensure that their agreements with contractors are drafted in a way that will help establish that the individual is a contractor under and not an employee of Montana law and the FLSA. To the extent that smaller employers reclassify large numbers of contractors as employees, they also should be aware of any coverage thresholds for employee benefits and leaves under federal, state, or local law that they may now be obligated to provide as a result of having a higher employee population.

For more information, questions, or information on how the DOL’s final rule may affect your business or employees, please contact one of the experienced employment attorneys at Worden Thane P.C.

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