DOL Finalizes Regulation on Determining Independent Contractor Relationship

On January 9, 2024, the Department of Labor (DOL) issued a final regulation revising the standard businesses must use when determining if a worker is an employee or an independent contractor under the federal Fair Labor Standards Act (FLSA). Along with the new rule, the DOL issued FAQ-style guidance, which provides detailed examples of its application.

The new measure, which will take effect on March 11, 2024, rescinds a regulation the Trump Administration issued right before leaving office in January 2021. This replacement rule restores using a previously long-standing six-factor test to determine the totality of each individual’s circumstances. The factors to be considered are:

• The opportunity for profit and loss depending on managerial skill;
• Investments by the worker and the potential employer;
• The degree of permanence of the work relationship;
• The nature and degree of control over the performance of the work and the working relationship;
• The extent to which the work performed is an integral part of the potential employer’s business and
• The skill and initiative of the worker

The new rule clarifies that no factor is presumed to have more weight than another when determining status. The DOL will instead rely on the multifactor “economic reality” test used by federal courts for many years to determine whether a worker is an employee or an independent contractor. Beyond those six key factors, the rule permits the DOL also to consider other factors that may in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work (i.e., an employee under the FLSA).

It is important to remember that this regulation only revises the employment standard the DOL will use when making independent contractor determinations under the FLSA. It does not affect other laws that use different standards for employee classification. For example, the Internal Revenue Code and the National Labor Relations Act have different statutory language and judicial precedents interpreted and enforced by other federal agencies. Similarly, this rule does not change state-level wage-and-hour laws that use different tests, such as the much stricter standard currently utilized in New Jersey. Since the FLSA does not preempt any other state or federal laws, businesses must comply with all other laws and apply whichever standard is the strictest.