Department of Labor Issues Final Rule on Worker Classification under the FLSA, Returning to More Employee-Friendly Analysis
On January 9, 2024, the United States Department of Labor (DOL) issued its long-awaited final rule (“Final Rule”) regarding worker classification under the Fair Labor Standards Act (FLSA or the “Act”).
The Final Rule — which takes effect March 11, 2024 — outlines the DOL’s “new” test for determining whether a worker is an employee (and is thus covered by the Act’s overtime and minimum wage protections) or an independent contractor for purposes of the FLSA. While the Final Rule is not itself “controlling” precedent, it reflects the DOL’s take on worker classification, which courts and other stakeholders use as guidance when addressing classification questions.
What’s Old Is (Officially) New Again: The Final Rule Returns to a Multi-Factorial “Totality of Circumstances” Analysis
As we previewed when covering the DOL’s proposed version of the Final Rule in 2022, “what’s old is new again.” The Final Rule largely jettisons the Trump Administration DOL’s short-lived guidance on worker classification under the FLSA and returns to the previous “totality of circumstances” approach.
Under this approach, six factors are considered:
- opportunity for profit or loss depending on managerial skill;
- investments by the worker and the potential employer;
- degree of permanence of the work relationship;
- nature and degree of control;
- extent to which the work performed is an integral part of the potential employer’s business; and
- skill and initiative.
None of these factors carries any pre-determined weight, none are dispositive, and other circumstances indicative of economic dependence may also be considered.
The Final Rule Is Widely Viewed as Employee-Friendly, But Doesn’t Go as Far as ABC Tests
The Final Rule’s holistic but murky analysis departs from the Trump-era rule’s focus on two “core factors” (control and opportunity for profit or loss) and is widely seen as having more of a pro-worker bend. The DOL’s Final Rule FAQ page reinforces the practical challenge of classifying many workers as independent contractors. For example, the DOL considers “integral part of the business” to mean “critical, necessary, or central to the potential employer’s principal business” — a broad formulation likely covering myriad services. By contrast, the prior rule had effectively eliminated the “integral part” factor, finding it unpersuasive on economic dependence and even misleading in some cases.
Yet the Final Rule does not go as far as the strict “ABC” tests — which start from a presumption of employment status — that govern under some state wage & hour laws, such as California and New Jersey. Employers in states with stricter rules must meet whichever standard provides the greatest protection for workers.
Regardless of the analysis applied, remember that workers cannot “waive” their status as an employee and voluntarily elect to be an independent contractor.
Highly Regulated Industries Take Note
The Final Rule purports to address the concerns raised by many commenters, especially from highly regulated industries, that compliance with “legal obligations, safety or health standards, or requirements to meet contractual or quality control obligations may indicate control[.]” According to the DOL, “actions taken by the potential employer for the sole purpose of complying with a specific, applicable Federal, State, Tribal, or local law or regulation are not indicative of control.” However, the DOL makes clear that anything going “beyond compliance” with these laws or regulations potentially indicates control — a distinction likely to be litigated in misclassification disputes.
Bottom Line: Be Careful When Classifying Workers as Independent Contractors
Under the Final Rule’s pro-employee guidance, it behooves businesses to proceed with caution when classifying an individual as an independent contractor. Companies should ask themselves (among other key questions relevant to the Final Rule’s six-factor test):
- Can the worker negotiate their pay? Does the worker market their services to multiple entities?
- Is the worker making entrepreneurial or capital investments, suggesting they are operating independently?
- Is the relationship with the worker non-exclusive? Is it project-based or sporadic, rather than indefinite or continuous in duration?
- Does the company set the worker’s schedule, supervise their performance, or control the economic aspects of the relationship (like setting rates for their services)? Importantly, even the reserved right to control these things can suggest employee status.
- Is the function that the worker performs critical, necessary, or central to the company’s principal business?
- Is the worker dependent on training for the employer to perform the work? Is the worker using specialized sill in connection with business-like initiative?
Companies uncertain about their classification decisions should reach out to counsel for advice. While the Final Rule is in many ways a return to the familiar, its issuance serves as an important reminder that independent contractor classifications come with many strings detached.
