USDOL Issues Final Rule Restoring the Narrower “Economic Reality” Standard for Independent Contractor Status Under the FLSA

Effective March 11, 2024, the U. S. Department of Labor (DOL) will implement its final rule, Employee or Independent Contractor Classification Under the Fair Labor Standards Act, rescinding the 2021 Trump era Independent Contractor Rule that made it easier for employers to establish independent contractor status.  The final rule substantially mirrors the Department’s proposed rule issued in October 2022.

Reaffirmation of the Economic Realities Test:

As noted in the DOL’s accompanying FAQ found here, the final rule “continues to affirm that a worker is not an independent contractor if they are, as matter of economic reality, economically dependent on an employer for work.”  The final rule reverts back to the narrower “totality of the circumstances” economic reality test in effect prior to 2021 that applied the following six non-exhaustive factors to analyze employee or independent contractor status:

  1. The worker’s opportunity for profit or loss depending on managerial skill;
  2. The investments by the worker and the employer;
  3. The degree of permanence of the work relationship;
  4. The nature and degree of control by the employer;
  5. The extent to which the work performed by the worker is an integral part of the employer’s business; and
  6. The skills and initiative exercised by the worker.

The final rule provides detailed guidance on the application of these factors, but cautions that none of the factors has a predetermined weight, and additional factors may be considered if they indicate whether the worker is in business for themselves (and thus an independent contractor) or is so economically dependent upon the employer (and thus must be classified as employees).

How the New Rule Differs from the 2021 Rule:

Although the superseded 2021 rule likewise focused on the economic reality factors, it designated “control” and “opportunity for profit and loss” as two “core factors” that were given greater predetermined weight than the other factors.  In addition, the prior test was limited to five factors, and prohibited consideration of whether the work performed by the worker was central to the employer’s business.  The new rule faults the narrowed focus of the 2021 test that did not consider the “totality of the circumstances” pertinent to assessing the economic reality of the parties’ relationship and made it easier for employers to establish independent contractor status.

In addition, the new rule omits a provision of the 2021 rule that minimized the relevance of the employer’s reserved but unexercised right of control over a worker.  Thus, employers who merely reserve the right to discipline, fire or otherwise control a worker but never exercise that right may nevertheless fail the lack of control factor of the test.

The New Rule Does Not Preempt the More Stringent “ABC” Test or Other Standards Used to Determine Independent Contractor Status: 

Employers who successfully establish independent contractor status under the DOL’s economic realities may be far from out of the woods.  As noted in the DOL’s FAQ, the final rule only revises its interpretation of independent contractor status under the FLSA, and does not affect other federal, state, or local laws that use different standards for employee classification.

The FAQ points out that the ABC test used by New Jersey and California to determine independent contractor status under state wage and hour laws remains undisturbed.  The ABC test is far more stringent and presumes that all workers are employees unless all factors of a stringent three factor test are met.  In contrast, the DOL’s rule gives employers more leeway because it relies on the totality of the circumstances and no one factor is determinative.  See our recent publication for further information about the application of the ABC test here.

Employers must be mindful that the factors that may qualify a worker as an independent contractor under the FLSA may not be sufficient to meet the various standards applied to other statutes by the courts and federal, state or local agencies to determine employee vs. independent contractor status.  Given the uncertainty in this area, employers should refer to the new DOL guidance and consult with employment law counsel before classifying any worker as an independent contractor.

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