By: Allison B. Cherundolo, CCB Law
A new final rule from the United States Department of Labor (“DOL”) went into effect on March 11, 2024 that changes how to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (“FLSA”). Rescinding the 2021 rule under which two key factors – control over the work and opportunity for profit or loss – carried greater weight, the final rule applies a six-factor test to ensure that an employer’s classification of its workers complies with the protections of the FLSA, primarily appropriate minimum wage payments and entitlement to overtime.
The six-factor test applies a “totality of the circumstances” analysis of the “economic realities” of the work relationship meaning that each factor is weighed equally on a case-by-case basis. The DOL has stated that its intent is not to give one factor a predetermined weight over the others. Thus, no single factor listed is determinative.
The following provides an overview of each of the factors that must now be considered in classifying workers as employees or independent contractors.
1. The Opportunity for Profit or Loss for the Worker
When evaluating the opportunity for profit and loss, an employer should consider facts such as whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space. The more of these things a worker does the more likely it is that they would be determined an independent contractor as opposed to an employee.
2. Investments of the Parties
This factor considers whether the worker’s investments “support an independent business and serve a business-like function, such as increasing the worker’s ability to perform different types of or more work, reducing costs, or extending market reach” – and how that compares to the employer’s investment in the business overall.
3. The Degree of Permanency of the Work Relationship
A work relationship that is “definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themselves and marketing their services or labor to multiple entities” would weigh towards classification as an independent contractor whereas a work relationship that “is indefinite in duration, continuous, or exclusive of work for other employers” would weigh in favor of classification as an employee.
4. The Nature and Degree of the Employer’s Control Over the Work
When considering this factor, an employer should evaluate whether it sets the worker’s schedule, supervises the performance of the work,…explicitly limits the worker’s ability to work for others, uses technological means to supervise the performance of the work, reserves the right to supervise or discipline workers,…places demands or restrictions on workers that do not allow them to work for others or work when they choose [, and/or] controls economic aspects of the working relationship…, including control over prices or rates for services and the marketing of the services or products provided by the worker. The more control an employer exercises over a worker the more likely this factor will favor classification as an employee as opposed to an independent contractor. Notably, control within legal requirements for safety, quality, and customer/patient standards may not necessarily dictate an employer-employee relationship.
5. The Degree to Which the Work is an Integral Part of the Employer’s Business
This factor considers not whether the worker is an integral part of the organization, but whether the work being performed is “critical, necessary, or central” to the company’s primary business. The less critical the work is to the organization, the more likely this factor favors classification as an independent contractor.
6. The Worker’s Skill and Initiative
The final factor focuses on the worker’s use of specialized skills. Where “those skills contribute to business-like initiative” this factor will favor classification as an independent contractor. However, where workers rely on the company for training to perform the work this factor will favor classification as an employee.