Summary:
The United States Department of Labor (DOL) published a final rule on January 9, 2024 that clarifies the distinction between an “employee” and an “independent contractor” under the Fair Labor Standards Act (FLSA).
This distinction is important to our clients because it determines whether a given worker is covered under the FLSA’s minimum wage, overtime pay, and recordkeeping obligations. Independent contractors are not considered employees and therefore are not covered.
Please note that this development does nothing to alter the test used by the Internal Revenue Service for the same question.
Detail:
The DOL has stated that the final rule aims to return to an “economic reality” analysis that requires an analysis of all relevant facts and circumstances. The “economic reality” in question is whether the worker is, as a matter of economic reality, in business for themselves (see 29 CFR § 795.110).
The DOL has positioned this as a return rather than a new paradigm because it is a tweaked and clarified version of how courts interpreted the FLSA before 2021. A 2021 rule narrowed the test from what had been interpreted in case law, and emphasized certain factors over others. This led to confusion and now this “return.”
The final rule sets forth six factors that should guide analysis, though other unlisted factors can be considered. They are:
- Opportunity for Profit or Loss Depending on Managerial Skill
If the worker’s managerial acumen in performing the work opens them up to the opportunity of profit or loss, they are most likely an independent contractor. Generally, offering more pay for more hours worked is not considered an opportunity for profit or loss.
- Investments by Worker and the Potential Employer
If the worker and Potential Employer are both making investments in the work that indicate they are carrying on independent businesses, the worker is most likely an independent contractor. This includes, on the worker’s part, purchases that are capital in nature and can be used for more than just the work being done for the Potential Employer. Purchases made by the worker at the Potential Employer’s instruction or made solely for a specific job are more indicative of employee status.
- Degree of Permanence of the Work Relationship
Work that is indefinite in duration, continuous, or exclusive is more likely employee work. Project-based, definite in duration, non-exclusive, or sporadic work tends to be that of an independent contractor. However, seasonal or temporary work where lack of permanence is intrinsic to a particular business or industry is generally not indicative of independent contractor status, unless the worker’s independent business initiative is shown by other means.
- Nature and Degree of Control
This includes both exercised control and potential but unexercised control that the Potential Employer holds over the worker’s work. This is an extremely fact-intensive factor requiring an analysis of all behavior of the Potential Employer with respect to the worker and the work. The analysis should review whether the Potential Employer sets the worker’s schedule, supervises performance, limits the worker’s ability to work for others, reserves the right to discipline, restricts them from working when they choose, controls the pricing of or rates for the worker’s services, markets the services or products provided by the worker, or enforces its own policies of compliance, safety, quality control, or customer service standards. Actions taken to comply with law or regulation, are not indicative of control. More indicators of control by the Potential Employer tend to show employee status.
- Extent to Which the Work Performed is an Integral Part of the Potential Employer's Business
This factor focuses on whether the function performed by the worker is a critical, necessary, or central part of the business. The more integral the function is to the Potential Employer, the more likely DOL is to see the person performing that function as an employee.
- Skill and Initiative
Where the worker brings specialized skills to the engagement and uses those skills in connection with a business-like initiative, those specialized skills can indicate an independent contractor relationship. However, without that initiative, specialized skills on their own do not present an indication towards either classification. Where the worker is dependent on training to perform the work, they are more likely an employee.
If these questions bring up any questions for you about your operations, it’s important to consult with an attorney who can help you understand and comply with all applicable laws and regulations. NOVA Business Law Group, LLP has experienced attorneys that can help guide you through worker classification issues. To learn more, contact us at 703-766-8081.
Joseph P. Kirkwood is a member of the Firm’s corporate transactional and government contracting practice groups.
To speak with an attorney from NOVA Business Law Group, LLC, contact us at 703-766-8081.