The U.S. Department of Labor (“DOL”) published a long-awaited final rule (the “2024 Final Rule”) on January 9, 2024, defining what it means to be an “independent contractor” under the Fair Labor Standards Act (“FLSA”). In sum, the 2024 Final Rule is more onerous on employers and will likely cause more independent contractors to be classified as employees.
The 2024 Final Rule rescinds a previous final rule from 2021 defining the same term. In contrast to the 2021 rule on independent contractors, the 2024 Final Rule implements a new six-factor test focusing on the “economic reality” of the relationship between an employer and worker. The test assesses whether, as a matter of economic reality, a worker depends on the employer for continued employment or if the worker is operating an independent business. The 2024 Final Rule becomes effective on March 11, 2024, and employers will need to assess their relationships with workers to determine if any may be misclassified under this new rule
The Road to the 2024 Final Rule
The 2024 Final Rule was issued to rescind the final rule issued in 2021 (the “2021 Rule”) where the term “independent contractor” was defined by the DOL for the first time. The definition of an “independent contractor” is important because independent contractors are not subject to the overtime and minimum wage requirements under the FLSA – only employees are. In addition, independent contractors are not eligible for employee benefits like group health insurance plans or paid leave.
Prior to the 2021 Rule, the DOL relied on (informal) guidance through Fact Sheet 13 to determine whether an employee is an independent contractor or an employee. The 2021 Rule issued a five-factor test in 2020 in an attempt to provide more clarity in worker classification. Even though there were five factors to consider, there were two “core” factors that drove the analysis: (1) the employer’s right to control; and (2) the worker’s opportunity for profit or loss. If those factors weighed heavily to one conclusion (employee or independent contractor) the analysis would end. But, if there was no clear result from analyzing those factors, the 2021 Rule went on to say three additional factors should be considered: (3) the permanence or length of the working relationship; (4) the worker’s special skills, if any; and (5) the worker’s integration into the employer’s operations.
What Does the 2024 Final Rule Say?
The 2024 Final Rule rescinds the 2021 Rule and adopts a six-factor test to determine whether a worker is an independent contractor or an employee. Those six factors include:
- the worker’s opportunity for profit or loss;
- the degree of which the employer controls how the work is to be performed;
- the amount of skill and initiative required for the work at hand;
- the degree of permanence of the working relationship;
- the worker’s investment in equipment or materials required for the work; and
- the extent to which the service rendered is an integral part of the employer’s business.
These factors are not to be viewed in a vacuum and should be assessed by reviewing the totality of the circumstances. This list is also not considered exhaustive, and other non-listed factors may also be considered. No one factor guides or controls the analysis.
What Should Employers Do in Preparation of the 2024 Final Rule Taking Effect?
- Review relationships with current independent contractors to determine if they need to be reclassified under the 2024 Final Rule.
- Review and evaluate internal classification policies and practices to determine if they align with the 2024 Final Rule.
- Take an inventory of all the classifications for their workers with a 1099 tax arrangement including assessing if any written agreements with such workers need updating, such as including class action waivers.
Berenzweig Leonard will continue to monitor updates and developments related to the 2024 Final Rule. Please contact us if you have questions or concerns about whether your independent contractors need to be reclassified to employees and what that entails for your business.
Samy Abdallah is an Associate Attorney at Berenzweig Leonard. He can be reached at sabdallah@berenzweiglaw.com.