Articles

Employment Law Update: DOL Publishes Final Rule for Classifying Workers Under the FLSA

Date: January 11, 2024
On January 10, 2024, the Department of Labor (DOL) published its final Rule on classifying workers as independent contractors under the Fair Labor Standards Act (FLSA). The Rule will take effect on March 11, 2024.

The Rule rescinds the 2021 Independent Contractor Rule, which was subject to much criticism and litigation. The 2021 Rule focused on two “core factors” – control and the opportunity for profit or loss – as the basis for evaluating whether a worker was truly an independent contractor.  Under the new Rule, which applies a six-factor test to determine worker classification,  classification determinations are now more complicated and less clear. As a result, businesses should pay particular attention to this new Rule and how it may impact their own contracted workers.

According to the DOL’s guidance, as is often the case, no one factor is dispositive. Instead, all factors are weighed to assess whether a worker is economically dependent on a potential employer for work or is in business for themself, according to the totality of the circumstances.  These factors are:
  1. Opportunity for profit or loss depending on managerial skill;
  2. Investments by the worker and the potential employer;
  3. Degree of permanence of the work relationship;
  4. Nature and degree of control;
  5. Extent to which the work performed is an integral part of the potential employer’s business; and
  6. Skill and initiative.
The Rule also provides for the consideration of additional factors that “may be relevant” to indicate whether a worker is in business for themself, as opposed to being economically dependent on the employer for work. Unfortunately, despite calls for clarity during the rulemaking process, the DOL has thus far declined to identify any examples of such additional factors.

The Six Factors, Briefly Explained
  1. Opportunity for profit or loss depending on managerial skill.
The focus here is whether the worker can make or lose money “based on managerial skill (including initiative or business acumen or judgment) that affect the worker's economic success or failure in performing the work.”
According to the Guidance, relevant facts may include: whether the worker plays a role in the charge or pay for work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which to perform jobs; whether the worker is involved in business expansion efforts, including marketing or advertising; and whether the worker makes decisions about hiring, purchasing materials and equipment, and/or renting space.
  1. Investments by the worker and the employer.
This factor considers any business investments made by the worker. The Guidance dictates that costs such as purchasing job-specific tools and equipment, the worker’s labor, and those imposed unilaterally on the worker are not considered capital investments and, accordingly, indicate employee status.
  1. Degree of permanence of the work relationship.
The work relationship is examined to evaluate if it is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself (indicative of independent contractor status), or whether the work relationship is indefinite in duration, continuous, or does not involve work for other employers (indicative of employee status).
  1. Nature and degree of control.
The issue of control evaluates the amount of control over the performance of the work and economic aspects of the work relationship. According to the DOL, some relevant facts may include whether the worker sets their schedule, is supervised in the performance of the work, and is limited in their ability to work for others.
  1. Extent to which the work performed is an integral part of the potential employer’s business.
The performance of work that is not necessary or central to the principal business weighs in favor of independent contractor status.
  1. Skill and initiative.
This last factor assesses whether the worker uses specialized skills to perform the work and whether those skills contribute to business management rather than simple job performance.

What Does This Mean For Businesses?

As always, even if a business and worker both agree or want to agree to an independent contractor relationship, that does not make it so. Indeed, the DOL, like its state counterparts, takes a very strong position against any such “private agreements.” With this new Rule, the ability to enter into independent contractor agreements will become even more challenging. Businesses should review their working relationships with any individuals who are currently classified as independent contractors to assess if reclassification is warranted. Please feel free to contact Whiteford’s Labor & Employment team with any questions.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.