DOL Finalizes Rule Tightening Independent Contractor Test

On Jan. 9, the U.S. Department of Labor (DOL) issued its final rule, “Employee or Independent Contractor Classification under the Fair Labor Standards Act.”  29 CR 780, 788, 795.  

The rule takes effect on March 11 and replaces the 2021 Independent Contractor Rule which the DOL believed ignored case law and the DOL’s position on independent contractor status. The new rule does not have any effect on other state or federal laws that have different standards for classifying independent contractors. It only applies to the Fair Labor Standards Act (FLSA).

Under the new rule, an individual is not an independent contractor if they are, as a matter of economic reality, economically dependent on an employer for work. The final rule applies six factors to analyze employee or independent contractor status under the FLSA:

(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.

No factor or set of factors among these 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 themselves, and therefore an independent contractor, as opposed to being economically dependent on the employer for work, thus an employee under the FLSA.

The final rule is 330 pages and contains detailed guidance regarding how to apply the factors. Employers need to act now to determine whether any individuals you currently have classified as an independent contractor will still be properly classified under the new rule.

It is highly likely that many individuals currently classified as independent contractors, will be classified as employees under the new rule, which is the point of the rule change.

This requires a complicated analysis, so seeking the advice of counsel may prove valuable to ensure your business is complaint with the final rule.

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