Key Takeaways:
- The new rule makes it more difficult under federal law to classify workers as independent contractors.
- The new rule adopts the six-factor economic realities test, rather than the more stringent “ABC” test adopted by several states including Massachusetts.
- Actions taken by employers specifically to comply with laws and regulations will not be deemed indicia of control.
On January 9, 2024, the Department of Labor (“DOL”)
released its much-anticipated Final Rule regarding the
classification of independent contractors under the Fair Labor
Standards Act (“FLSA”). This final rule, which comes
more than a year after the DOL received comments on its October
2022 proposed rule, imposes a tougher standard for classifying
workers as independent contractors under the FLSA and, as such,
will result in more workers being classified as employees rather
than independent contractors. Under the new rule, the
“ultimate inquiry” as to whether a worker must be
classified as an employee for the purposes of the FLSA is whether
the worker is economically dependent on the employer for work. If a
worker is economically dependent on the employer, the worker is an
employee. If not, the worker may be properly classified as an
independent contractor.
To determine a worker's economic dependence on an employer,
the DOL will employ an “economic realities test,” which
assesses six non-exhaustive factors. No one factor is dispositive,
and the weight given to each factor will vary depending on the
facts and circumstances of the particular relationship. The six
factors are:
- 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
- Skill and initiative
The test notably does not adopt the restrictive
“ABC” test currently in place in several jurisdictions,
including Massachusetts, opting for a more holistic approach to
evaluating whether workers are classified correctly. However, the
final rule includes a lengthy description of the types of facts
that are relevant (and not relevant) to each factor, some of which
are likely to preempt common employer arguments for why a worker is
an independent contractor. While many of the descriptions tend to
foreclose common arguments in favor of independent contractor
classification, the Final Rule does codify an important argument in
favor of independent contractor classification — actions
taken by the employer for the sole purpose of complying with
specific, applicable Federal, State, or local laws are not to be
considered indicia of control.
The Final Rule — which rescinds a proposed Trump-Era rule
that weighed two of the enumerator factors more heavily that the
rest combined — will take effect March 11, 2024. Before then,
employers should review their independent contractor relationships
to evaluate whether the newly-published economic realities test
will require a change in their classification. In doing so,
however, employers should be mindful of state laws that impose more
stringent tests like the aforementioned ABC test for determining
whether an independent contractor classification is proper. In
states with tougher laws on this subject, like Massachusetts,
employers will need to abide by state law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
