DOL Updates Guidance for Employee vs. Independent Contractor Classification

On January 10, 2024 the U.S Department of Labor (DOL) issued a final ruling, Employee or Independent Contractor Classification under the Fair Labor Standards Act, to provide guidance on whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FSLA). This final ruling rescinds the Independent Contactor Status under the Fair Labor Standards Act rule published in January of 2021. This ruling will take effect on March 11, 2024.

The primary purpose of the new ruling is to reduce the likelihood of misclassification and provide guidance that aligns with previously established judicial precedent. Misclassification of a workers not only creates serious problems related to workers’ rights to minimum wage and overtime pay, as well as proper taxation and withholdings, but it also provides some employers an opportunity to undercut competition and create competitive advantage through misapplying the law. By implementing a more consistent ruling, the DOL hopes to reduce confusion, improve compliance, and better protect the working people.

Key Considerations of the Final Ruling

Under prior guidance, relevant factors used to determine whether a worker was economically dependent on the employer for work (an employee) or in business for themselves (independent contractor) were limited by various provisions. Additionally, a departure from decades of case law created confusion regarding the proper classification of workers.

To better align with the approach taken by federal courts, the final ruling revises the previous guidance by:

• Returning to the multifactor, totality-of-the-circumstances analysis to assess whether a worker is an employee or an independent contractor under the FSLA, where no single factor or group of factors is assigned a predetermined weight; and
• Removes the use of “core factors” that were more prohibitive and carry greater weight in the analysis

Additionally, the final ruling considers the Six Factors of Economic Reality, including:

1. Any opportunity for profit or loss a worker might have;
2. The financial stake and nature of any resources a worker has invested in the work;
3. The degree of permanence of the work relationship;
4. The degree of control an employer has over the person’s work;
5. Whether the work the person does is essential to the employer’s business; and
6. A factor regarding the worker’s skill and initiative.

The final ruling provides detailed guidance regarding the application of each of these six factors, emphasizing that no single factor has a predetermined weight, and additional factors may be relevant on a case-by-case basis. These additional factors will be considered relevant if they, in some way, indicate whether the worker is in business for him/herself or is economically dependent on the potential employer for work.

A worker does not need to satisfy all economic reality factors to qualify as an independent contractor. Under the economic reality test, no single factor, or combination of factors, automatically determines status as an employee or independent contractor. All circumstances are weighed and considered to determine whether a worker is economically dependent on a particular employer. Additionally, workers cannot waive their rights to be considered an employee and be treated as an independent contractor under the FSLA.

Economic Reality Factors

Relevant information provided under each factor below does not include an exhaustive list of considerations as other information may be relevant on a case-by-case basis.

Opportunity for Profit or Loss Depending on Managerial Skill

This factor considers whether the worker has opportunities for profit or loss based on managerial skill that will have an impact on the worker’s economic success or failure. If a worker has no opportunity for a profit or loss, then this factor will favor employee status.

Relevant facts include:

• Whether the worker determines or can meaningfully negotiate the charge or pay for the work provided
• Whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed
• Whether the worker engages in marketing, advertising, or other efforts to expand business or secure more work
• Whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space

Investment by the Worker and Employer

This factor considers whether any investments by a worker are capital or entrepreneurial in nature, including but not limited to, those that increase the worker’s ability to do different types of or more work, reduce costs, or extend market reach. Investments that meet these criteria would indicate independent contractor status. Examples of investments that are not considered to be capital or entrepreneurial in nature include expenses for a worker’s tools and equipment to perform a specific job, costs of worker’s labor, and charges that the potential employer imposes unilaterally on the work. These types of investments would indicate employee status.

Degree of Permanence of the Work Relationship

This factor points towards the worker being an employee when the work relationship is indefinite, continuous, or exclusive of work for other employers. Conversely, if the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themselves and marketing their services or labor to multiple entities, this factor points towards an independent contractor relationship.

Seasonality or temporary nature of work by itself would not necessarily indicate independent contractor status. Surrounding circumstances should also be considered.

Nature and Degree of Control

This factor considers the potential employer’s control, including reserved control, over performance and economic aspects of the working relationship. Relevant facts include whether the potential employer:

• Sets the worker’s schedule
• Supervises the performance of the work
• Explicitly limits the worker’s ability to work for others

Additionally, control over economic aspects such as influence over pricing for services and the marketing of services should be considered. Compliance actions taken by employers for federal, state, local and tribal purposes are not indicative of control.

More control by the employer favors employee status; whereas, more control by the employee favors independent contractor status.

Extent to Which the Work Performed Is an Integral Part of the Employer’s Business

This factor does not depend on any individual worker being an integral part of the business. The important consideration is whether the function the worker performs is an integral part of the business. When the work is critical, necessary, or central to the employer’s principal business, this indicates employee status. Conversely, if the work is not critical or necessary, this indicates independent contractor status.

Skill and Initiative

This factor considers the use of specialized skills to contribute to business initiatives. If the worker’s specialized skills are used in connection with business initiatives, this indicates independent contractor status. Employee status is indicated if the worker does not use specialized skills and relies on the employer for training to perform work.

Specialized skills alone are not indicative of the appropriate classification because both employees and independent contractors can possess specialized skills. Those skills must be used in connection with business initiatives to favor independent contractor status.

Additional Resources

The DOL website includes an updated Fact Sheet, FAQs, and a Small Entity Compliance Guide to address common questions and provide guidance on the impact and proper application of the final ruling. If you need further assistance or advice about the implications and application of this final ruling, please reach out to your GYF Tax Executive at 412-338-9300.