U.S. Department of Labor Finalizes Regulation Tightening Rules on Independent Contractors

Yesterday, the U.S. Department of Labor (DOL) issued a new rule updating its test for determining whether a worker is an “independent contractor” or an “employee” for purposes of minimum wage and overtime under the Fair Labor Standards Act (FLSA).

The new rule requires the application of a six-factor “economic reality” test to determine whether the worker is an employee or independent contractor.  The six factors are not exhaustive, and no single factor or group of factors is determinative.  The factors are:

1. the worker’s opportunity for profit or loss depending on his or her managerial skill;
2. the financial stake and nature of any resources the worker invested in the work;
3. the degree of permanence of the work relationship;
4. the company’s nature and degree of control over the worker and the work;
5. whether the work performed is an integral part of the company’s business (ie., whether the work is “critical, necessary or central to the company’s principal business”); and
6. the worker’s skill and initiative.

These factors are similar to those that were in place prior to the independent contractor rule that the DOL published in January 2021, right before the change in presidential administrations.

Based on an application of the six factors, workers who are in business for themselves are more likely to be classified as independent contractors, while workers who are economically dependent on an employer for work are more likely to be employees.

When it issued the new rule, the DOL went out of its way to ease concerns that the new rule is not the same as California’s ABC test, under which most workers are classified as employees.  Nonetheless, given the DOL’s description of the six factors and the change from the 2021 rule, it seems likely that more workers will be classified as employees under the new rule.  The new rule does not affect the test used by the IRS or NLRB to determine independent contractor status under the laws administered by those agencies.

The new rule is scheduled to take effect on March 11, 2024, although it will likely be challenged in court.

If you have questions about the new independent contractor regulation or would like guidance on determining whether a worker is an independent contractor, please contact one of the authors or your favorite Miller Johnson employment attorney.