On January 10, 2024, the U.S. Department of Labor issued a new regulation aimed at more clearly defining the distinction between employees and independent contractors under the Fair Labor Standards Act (FLSA), particularly in relation to minimum wage and overtime provisions.
Six-Factor Assessment
This regulation reintroduces a six-factor assessment to determine if a worker is economically reliant on their employer or operating as an independent entity. The six criteria involved in this assessment are:
- The worker’s potential for profit or loss, influenced by their managerial skills.
- Financial contributions from both the worker and the potential employer.
- The stability and duration of the working relationship.
- The level and type of control exerted in the relationship.
- The significance of the work performed in relation to the employer’s business.
- The worker’s skill and entrepreneurial initiative.
The rule emphasizes that no single factor is conclusive. Instead, it’s the cumulative effect of all circumstances that shapes the final determination. Other relevant factors may also be considered if they contribute to the overall understanding of the worker’s economic dependence.
Supersedes Five-Factor Model
This new directive supersedes a previous five-factor model established by the Trump administration in 2021, which prioritized the employer’s control and the worker’s profit or loss potential as primary factors, with additional consideration given to the permanence of the relationship, the worker’s unique skills, and the integration of the work into the employer’s operations.
This reinstated six-factor framework is not new to employment law, as it has been utilized by courts since a 1947 Supreme Court ruling in United States v. Silk under the Social Security Act. While interpretations of these factors have varied slightly, they have consistently served as guidelines in judicial decisions.
Business Benefit
From a business perspective, the rule is advantageous, aligning with longstanding legal interpretations and providing a level of consistency with the FLSA’s text and purpose. The DOL acknowledges the vital role of independent contractors in the economy and emphasizes that the rule is not intended to adversely impact genuinely independent businesses.
In response to public feedback, the DOL amended several aspects of the rule, most notably regarding the nature and extent of control. The final version clarifies that compliance with specific legal requirements does not automatically imply employee status. Additionally, the rule distinguishes between investments made by the worker and the company, and clarifies that investments imposed by the employer do not suggest independence. It also details that earning potential based on hours worked or tasks completed doesn’t necessarily indicate entrepreneurial opportunity, and that possessing specialized skills alone does not equate to economic independence.
Impact on Classifying Independent Contractors
Despite these clarifications, the new rule presents a more stringent criterion for classifying independent contractors, leaving businesses with less certainty due to the multifaceted and fact-specific nature of the assessment.
Goes Into Effect
The rule is set to take effect on March 11, 2024, but it may face legal challenges and congressional scrutiny. Furthermore, there is an ongoing lawsuit related to the delay and subsequent withdrawal of the 2021 regulation.
What you need to do.
Business owners are advised to reevaluate their independent contractor agreements to mitigate litigation and misclassification risks. Misclassified workers could seek damages for unpaid minimum wages or overtime, among other claims, which can be costly and disruptive. You should ensure their classifications align with the revised criteria to avoid potential legal issues.
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