Employee or Independent Contractor Classification under the Fair Labor Standards Act Effective March 11, 2024

The U.S. Department of Labor (DOL) has modified the Wage and Hour Division Regulations to replace its 2021 analysis for determining whether a worker is an employee or independent contractor (Final Rule). The previous test gave greater weight to control and opportunities for profit and loss.

Effective March 11, 2024, under the Final Rule the employee or independent contractor classification determination will focus on the economic realities of the worker’s relationship and whether the worker is either economically dependent on the potential employer for work or is in business for himself. In short, is the worker dependent upon the business to which it renders services for work?

Economic dependence does not focus on the amount of income the worker earns, but rather whether the worker has other sources of income from other customers. To determine economic dependence, the DOL assesses seven factors and conducts a totality-of-the-circumstances analysis. No one factor carries more weight. The DOL looks at the working relationship, the workplace, and the particular industry.

Under the Final Rule, Section 795.105, DOL, uses the following tools and/or factors in its determination:

1. Opportunity for profit or loss depending on managerial skill (including initiative or business acumen or judgment) that affects the worker’s economic success or failure in performing the work. For example, the fact that a worker has no opportunity for loss indicates employee status. Accessing fines, penalties, or chargebacks on a worker for faulty performance also suggests an employee relationship.
2. Investments by the worker and the potential employer. Costs to perform a certain job are not enough. The DOL is looking for capital or entrepreneurial investment that prepares for the future. For example, the worker is making the same types of investments (i.e., purchasing a truck) as the potential employer.
3. Degree of permanence of the work relationship. If the work relationship is indefinite in duration, continuous, or exclusive, it suggests an employment relationship.
4. Nature and degree of control including reserved control. For example, factors that show control include using technological means to supervise, non-competes, and lack of negotiation over rates, prices, etc.
5. Extent to which the work performed is an integral part of the business. Is the work performed critical, necessary, or central to the business?
6. Skill and Initiative. How are a worker’s specialized skills are used in connection with business-like initiatives?
7. Additional factors. Other factors not covered above may also indicate that the worker is in business for himself.

Not particularly relevant to the Department of Labor’s analysis is the incorporation of the worker, the existence of independent contractor agreements (which may work against the business with respect to control), or the licensure of the workers.

Once the Final Rule takes effect, employers will have a harder time determining if workers are misclassified as independent contractors and there will be increased scrutiny by the DOL and the courts. The spillover effect will be that businesses will treat more workers as employees eligible for full benefits, tax withholding, and employment discrimination protections. There are already several legal challenges in federal courts.

Please consult with your counsel or contact a Danna McKitrick employment law attorney.

Authored by Attorney Ruth Binger. Binger serves both emerging and mature businesses concentrating in corporate law, intellectual property and technology law, cybersecurity, digital media law, and labor and employment law. Her commitment to the success of small to medium-sized businesses, and her understanding of multi-faceted issues inherent in operations, are what distinguish Binger’s practice.

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