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The U.S. Department of Labor (DOL) issued a final rule (the “Final Rule”) on January 10, 2024 revising the guidance on which workers are independent contractors under the Fair Labor Standards Act (FLSA). The FLSA establishes minimum wage and overtime pay, among other requirements, that are applicable to employees but not independent contractors. The Final Rule rescinds a previous interpretation that was published in 2021 (the “Prior Rule”) and replaces it with what the DOL states is “more consistent with the FLSA as interpreted by longstanding judicial precedent.”

The Prior Rule aimed to establish a framework for distinguishing between employees and independent contractors, an issue not explicitly addressed by the FLSA itself. Consequently, various standards emerged, primarily focusing on the economic realities of the employment relationship. The Prior Rule introduced a five-factor economic reality test, emphasizing the degree of control over work and the worker’s opportunity for profit or loss as central elements. The Final Rule replaces this with a six-factor economic reality test, considering the totality of circumstances. None of the factors carry inherent weight, and no single factor is determinative. This revision is perceived as favoring employees to a greater extent.

 Legal document Independent Contractor Agreement on paper close up.

Although the Final Rule became effective on March 11, 2024, legal challenges have surfaced. Previous litigation contested the withdrawal of the Prior Rule in May 2021, achieving success initially but facing a stay upon appeal, awaiting new rulemaking. Subsequent complaints have challenged the DOL’s authority to issue legislative rules defining employment relationships under the FLSA. These lawsuits seek injunctive relief against enforcing the Final Rule and its invalidation. Additionally, Congressional Republicans are exploring legislative avenues, including the introduction of a Congressional Review Act (CRA) resolution, to counteract the Final Rule.

Despite ongoing legal contestation, the Final Rule remains in effect. Employers are advised to adopt the following measures to ensure proper worker classification and regulatory compliance:

  • Conduct thorough evaluations, applying the totality-of-the-circumstances analysis of the economic reality test prescribed by the new rule, before engaging individuals for work, which is:
    • Opportunity for Profit or Loss: Depending on managerial skill
    • Investments: Both by the worker and the potential employer
    • Degree of Permanence: Regarding the work relationship
    • Nature and Degree of Control: Over the work
    • Extent of Integration: Whether the work performed is an integral part of the potential employer’s business
    • Skill and Initiative: Demonstrated by the worker
  • Review existing independent contractor arrangements to ascertain proper classification
  • Following assessments, adjust worker classifications as necessary to align with the standards outlined in the Final Rule
  • Scrutinize and amend existing contracts with independent contractors to accurately reflect the nature of the working relationship, devoid of provisions that may imply an employment relationship
  • Update organizational policies and procedures to reflect the nuanced distinctions between employees and independent contractors as delineated by the Final Rule

See article focused on skill and initiative here.

For more information, visit:  https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking

Contributing Author

Stuart Wales, MS, SHRM-CP, PHR, CCP
Senior Consultant, Total Rewards
Nonprofit HR

Stuart Wales is an HR technology advocate, working with clients to leverage solutions that align not only with their current needs but also their strategic needs for the future. Focusing on improved employee experiences, Stuart works with clients to streamline and adapt existing processes and HR programs from a technology lens to transform HR into a strategic partner with the organization and improve mission outcomes. Stuart also works with clients on compensation programs that provide a competitive advantage for talent. Whether it’s creating market-based pricing and compensation structures or performing statistical analyses for compensation equity, Stuart serves as a partner for ensuring that total rewards supports clients’ people strategy.

Learn more about Stuart – see his full bio and other articles he’s authored

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