Key Takeaways:

• The Department of Labor recently clarified a critical distinction between an employee and an independent contractor.

• The courts will no longer use the Trump-era rule that focused on two core factors: profit and control.

• Instead, the courts will return to the totality-of-the-circumstances analysis, which takes into consideration additional relevant factors such as permanency, investment, and the utility of skill as it pertains to the nature of the employer’s business.

• In reframing this standard, the DOL hopes to lessen the extent of employee misclassification, which has become a serious concern for workers who are denied basic rights and protections.

On January 9, 2024, the United States Department of Labor announced a final rule that provides both employers and employees with a better understanding as to when a worker may be classified as an independent contract under the Fair Labor Standards Act. The term “independent contractor” refers to a worker who, as a matter of economic reality, is not economically dependent upon an employer for work and is ultimately in business for themselves.

Independent contractors play a crucial role in the economy and are otherwise commonly referred to as self-employed or freelancers. This rule is not intended to disrupt the businesses of independent contractors who are, as a matter of economic reality, in business for themselves. Although the FLSA does not clearly define the exact parameters of “independent contractor,” it contains expansive definitions of “employer,” “employee,” and “employ.” “Employer” is defined to include any person acting directly or indirectly in the interest of an employer in relation to an employee. “Employee” is defined as “any individual employed by an employer.” To suffer or permit to work are included as part of the definition of “employ.” As detailed below, courts have developed an analysis that recognizes that independent contractors are not included within the remit of these definitions.

The rule, which was initially proposed on October 13, 2022, rescinds the Trump-era rule that focused on two core factors—control and profit—a rule which never actually went into effect. Instead, the DOL announced its intent to return to the “totality-of-the-circumstances analysis” in which several economic reality factors are taken into consideration.

The primary inquiry is whether, as a matter of economic reality, the worker is economically dependent upon the employer for work, and is thus an employee, or the worker is in business for him- or herself, and is thus an independent contractor. When answering the question of economic dependence, courts and the DOL have historically conducted a totality-of-the-circumstances analysis, considering multiple factors to determine whether a worker is an employee or an independent contractor, with no single factor or factors carrying predetermined or heightened weight.

At this juncture, there is no circuital split among the federal courts of appeals in the adoption and application of the economic reality test, although there is slight variation as to the number of factors considered or how the factors are framed. These factors generally include the opportunity for profit or loss, investment, permanency, control, whether the work is an integral part of the employer’s business, and skill and initiative. More specifically, these six non-exhaustive factors are considered are as follows:

• Worker’s opportunity for profit or loss;
• Investments made by worker and potential employer;
• Extent of permanency in the work relationship;
• Extent of control an employer has over the person’s work;
• Extent to which work performed is integral to the employer’s business; and
• Utility of worker’s skill and initiative, relative to the employers’.

The DOL’s rule, which goes into effect on March 11, 2024, establishes more consistent guidance for employers when tasked with answering what can be considered the primary question in defining this distinction: Are workers are economically dependent on the employer for work or are they in business for themselves?

In making this change, the DOL sought to provide clarity against frequent misclassifications in the workplace, resulting in detriment to workers’ rights to minimum wage and overtime pay, as well as more sinister outcomes such as wage theft. Misclassification of employees as independent contractors is a serious concern that denies workers basic rights and protections. This new rule aims to protect workers, particularly those most susceptible to exploitative conduct on the part of their employers.

Since the DOL’s first publication of this notice on October 13, 2022, it now believes that the prior construct of this test fails to fully comport with the FLSA’s text and purpose as construed by courts and has created an unfortunate departure from the decades of precedent controlling the economic reality test. Legal experts expect this new rule to face court challenges, but the DOL remains confident in its establishment of the analysis. The DOL carefully considered relevant case law under the Fair Labor Standards Act in developing the rule, and is certainly prepared to defend against any challenges it may confront in reviewing courts across the country.

If you have any questions about these changes or how they impact your business, please contact:

• Danielle N. Malaty
• Caroline J. Berdzik
• Scott R. Green
• Or another member of our Employment and Labor practice group.