Employee or Independent Contractor? Six factors to consider under new DOL rule

Types : Alerts

This week, the U.S. Department of Labor (DOL) issued its final rule describing its analysis for determining employee or independent contractor classification under the Fair Labor Standards Act (FLSA), the statute which sets federal standards for minimum wage, overtime pay, and record-keeping. Employers must follow the new rule to avoid misclassification lawsuits and any finding of misclassification, which can result in unpaid overtime and minimum wage penalties, liquidated damages, and attorneys’ fees.

What’s new?

The rule, which will take effect March 11, requires consideration of six non-exhaustive factors in classifying workers for FLSA purposes, including the following: (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 provides additional guidance on the meaning of each of these factors and is consistent with the “economic reality” test, which has been applied by the DOL and courts since the 1940s.

Unlike the prior 2021 rule, “no factor or set of factors among this list of six has a predetermined weight, and additional factors may be relevant if such factors in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work (i.e., an employee under the FLSA).”¹

What hasn’t changed?

Other laws and regulations: The final rule does not affect the analysis for determining worker classification under other federal, state, and local laws, such as the Internal Revenue Code and National Labor Relations Act, which have their own statutory language and precedent. This rule only revises the DOL’s interpretation under the FLSA.

ABC tests: While the new rule does not adopt an “ABC” test (permitting an independent contractor relationship only if all three factors in a three-factor test are satisfied), it also does not affect state wage and hour laws which still use an ABC test, like California and New Jersey. Employers must still comply with all federal, state, and local requirements.

Finally, if a worker is an employee under the FLSA under the new rule, they cannot waive FLSA-protected rights (i.e. minimum wage, overtime requirements) by electing to be classified as an independent contractor.

If you have questions regarding the new DOL rule, please contact a member of Montgomery McCracken’s Labor and Employment Department.

¹ See U.S. Department of Labor, Wage & Hour Division, “Frequently Asked Questions – Final Rule: Employee or Independent Contractor Classification Under the FLSA,”(https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking/faqs#g6)