On January 9, 2024, the United States Department of Labor (DOL) issued a “new” Final Rule (the Rule), effective March 11, 2024, detailing how the DOL will determine whether a worker is an independent contractor or an employee for purposes of the Fair Labor Standards Act (FLSA), see here. This so-called new Rule, originally proposed in October 2022, is actually not new at all – it reinstates an equally weighted economic realities test that was developed through Supreme Court jurisprudence over the years and is a direct repudiation of the Trump-era rule that made it easier for hiring entities to classify their workers as independent contractors.
The Trump rule set out five factors to consider for worker classification. The test was imbalanced, explicitly highlighting two factors as the most important: (1) the company’s degree of control over the worker and (2) the worker’s ability to earn a profit. The other three factors that were deemed less important were: the skill required by the worker, the degree of permanence of the relationship between the worker and the hiring entity, and whether “the work is part of an integrated production unit.” Based on this old rule’s test, if workers had some freedom in structuring their work and had the opportunity to make money off of that work, then they were properly classified as independent contractors. This Trump rule was a boon to the healthcare, trucking, construction, and gig economy industries, in particular.
The “new” Rule focuses the inquiry on whether the workers are in business for themselves. Put differently, is the worker economically dependent on the hiring entity, or economically dependent on the worker’s own business? If yes, then the worker is an employee. As a result, DOL now has an unweighted list of non-exhaustive factors to consider. These six factors are: (1) the opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the hiring entity; (3) the degree of permanence of the relationship; (4) the nature and degree of control; (5) the extent to which the work performed is an integral part of the employer’s business; and (6) skill and initiative.
The first factor is a material departure from the Trump rule. To be an independent contractor under this factor, the worker’s ability to earn a living must be tied to the managerial skill the worker needs to use. Examples of managerial skills are:
- whether workers can meaningfully negotiate their pay for the work;
- whether they accept a particular consulting job;
- whether they control when they work on the job;
- whether they engage in activities like marketing to expand their business; and
- whether the workers are the ones purchasing materials or equipment.
