January 12, 2024 – This week, the U.S. Department of Labor (“DOL”) issued its final rule on Employee or Independent Contractor Classification under the Fair Labor Standards Act (“FLSA”). This “New Rule,” effective March 11, 2024, closely follows the DOL’s 2022 proposed rule, rescinding and replacing the 2021 Independent Contractor Status Under the FLSA Rule (“2021 IC Rule”).

The 2021 Rule

The 2021 IC Rule (which was published on January 7, 2021, less than three weeks before President Biden took office) departed from the economic realities test long used by courts and the DOL to determine whether a worker is an employee or independent contractor under the FLSA. The 2021 IC Rule identified five factors – two “core factors” carrying greater weight in the analysis, and three less probative, “non-core factors” – to guide the inquiry into determining a worker’s status. The two core factors consisted of the nature and degree of control over the work and the worker’s opportunity for profit or loss. The non-core factors included: the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the potential employer, and whether the work was part of an integrated unit of production.

The New 2024 Rule

The New Rule is more akin to the multi-factor economic realities test followed by courts for several decades. The New Rule utilizes a six-factor test, with no one factor being determinative. The New Rule considers the totality of the circumstances of the working relationship, and no single factor carries a greater weight than another. These factors are:

1. The degree to which the employer controls how the work is done;
2. The worker’s opportunity for profit or loss;
3. The amount of skill and initiative required for the work;
4. The degree of permanence of the working relationship;
5. The worker’s investment in equipment or materials required for the task; and
6. The extent to which the service rendered is an integral part of the employer’s business.

The New Rule is not tailored to any particular industry and is intended to be broadly applied to all types of workers. The DOL intends to release additional guidance to assist employers in complying with the New Rule, some of which is likely to be industry specific.

The New Rule is considered to be more employee-friendly than the 2021 IC Rule, and the DOL has stated that the New Rule “will reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.” Acting Secretary of Labor Julie Su also stated in a press release that the New Rule is designed to ensure that “workers get the protections they need while also leveling the playing field for employers,” suggesting that businesses that misclassify workers have an unfair advantage over their law-abiding competitors.

If you have any questions about the New Rule, please feel free to contact the Kullman attorney(s) with whom you work.