The U.S. Department of Labor (DOL) has issued a final rule changing the criteria for classifying independent contractors under the Fair Labor Standards Act (FLSA). The final rule, which is largely the same as the proposed rule, takes effect on March 11, 2024.
The DOL Final Rule
The final rule has significant implications for gig workers, who often work through app-based businesses, freelance workers, and consultants, whom businesses long have treated as independent contractors. While employees are entitled to certain benefits under FLSA, such as overtime pay and minimum wage, independent contractors are not. On the other hand, independent contractors generally have more flexibility to set their schedules and work for more than one company at a time.
Under the 2021 rule, which the final rule repeals, employers gave greater weight to two core factors in classifying workers as employees or independent contractors: control over the work and opportunity for profit and loss. Under the new rule, employers must use a “totality-of-the-circumstances” analysis to make this determination, in which they give equal weight to the following factors:
- The degree to which the employer controls how the work is done;
- The worker’s opportunity for profit or loss;
- The amount of skill and initiative required for the work;
- The degree of permanence of the working relationship;
- The worker’s investment in equipment or materials required for the task; and
- The extent to which the service rendered is an integral part of the employer’s business.
This analysis gives no predetermined or greater weight to any of the six factors, and these factors are not exhaustive. Although the DOL intends to release further guidance to aid employers in making this determination, the agency did clarify that work-related expenses imposed by the employer are not indicative of contractor status, and actions that an employer takes to comply with the law do not constitute “control” exercised by the employer.
The NLRB Decision
The National Labor Relations Board (NLRB) issued a decision in June 2023 that redefined how employers determine whether a worker is an independent contractor under the National Labor Relations Act (NLRA). This distinction is critical, as independent contractors can neither form unions nor file unfair labor practice charges with the NLRB.
Previously, entrepreneurial gain or loss was the major factor for consideration in the independent contractor test. However, the NLRB ruled that entrepreneurial gain or loss should be considered along with a list of traditional common law factors in determining whether a worker is an employee or an independent contractor. Those factors include:
- The extent of control that the employer exercises over the details of the work;
- The method by which the employer pays the worker;
- The level of skill required to complete the work; and
- Whether the employer supplies the tools and place of work.
