On Jan. 9, 2024, the U.S. Department of Labor (DOL) released a final rule, effective March 11, 2024, revising the agency’s guidance on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA). This final rule rescinds the current independent contractor rule that was published on Jan. 7, 2021, and mirrors the DOL’s proposed rule.
2021 Independent Contractor Rule – The DOL published the 2021 Independent Contractor Rule on Jan. 7, 2021. The 2021 rule reasserted the economic realities test (ERT) as the DOL’s preferred method to determine whether a worker should be classified as an employee or independent contractor under the FLSA. In doing so, the 2021 rule focused on two core factors: the nature and degree of the worker’s control over the work; and the worker’s opportunity for profit and loss based on initiative and/or investment. These factors carried more weight in determining the status of independent contractors.
Final Rule – The final rule rescinds the 2021 Independent Contractor Rule and returns to the pre-2021 rule precedent. In doing so, the final rule restores the multifactor, totality-of-the-circumstances analysis to assess whether a worker is an employee or an independent contractor under the FLSA. The final rule ensures all ERT factors are analyzed equally. These six factors include the opportunity for profit or 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, the extent to which the work performed is an integral part of the potential employer’s business, and the worker’s skill and initiative. The final rule may result in classifying a greater number of workers as employees rather than independent contractors. The DOL has released guidance to help employers comply with the final rule.
Cheat Sheet – The following cheat sheet outlines the DOL’s economic reality test for classifying workers. It also includes the IRS’ description of the common law test for determining worker status. Employers can use this information to help confirm they are considering the relevant factors when classifying workers. Click the following link to read the Cheat Sheet.
For more on this topic check out our recent HR chat where Rob and Jason dissect the six factors that determine the classification of workers as independent contractors or employees:
Do you have questions surrounding the new rule or how workers should be classified? Reach out to Employco for proactive strategies to ensure compliance, we’re here to help: hr@employco.com