On January 10, 2024, the United States Department of Labor (DOL) issued its long-awaited final rule revising the department’s guidance on how to determine whether a worker is classified as an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The final rule has been published in the Federal Register and will take effect on March 11, 2024.
The FLSA establishes certain wage and hour rights for employees. It prevents employers from misclassifying workers as independent contractors and therefore denying them the right to minimum wage, overtime pay, and other protections.
The 2024 final rule, originally proposed in October 2022, rescinds the more business-friendly 2021 Independent Contractor Rule, which emphasized certain factors, such as the degree of control over the work and the worker’s opportunity for profit and loss. The DOL withdrew the 2021 rule after President Biden took office due to its misalignment with the longstanding economic realities analysis. No new rule was proposed at that time. In early 2022, a Texas federal court deemed the withdrawal of the 2021 rule unlawful and reinstated it. Although the DOL appealed this decision, the appeal was put on hold in anticipation of the introduction of new proposed regulations.
The 2024 rule, which is more favorable to employees, reinstates the heavy emphasis on a worker’s economic dependence on the employer and readopts a totality-of-the-circumstances test that has been used by courts for many years. The new test analyzes each of the following factors to determine employee or independent contractor status:
- The worker’s opportunity for profit or loss depending on managerial skill
- Investments made by the worker and the potential employer
- Degree of permanence of the work relationship
- Nature and degree of control the employer has over the work performed
- Extent to which the work performed is an integral part of the potential employer’s business
- The worker’s skill and initiative
The rule clearly states that no single factor or group of factors is assigned a predetermined weight. It also allows for consideration of other factors outside of the six-factor test if relevant to determining a worker’s economic dependence on the employer.
Notably, the 2024 rule only alters the department’s interpretation under the FLSA and has no impact on other federal, state, or local laws that may have distinct criteria for worker classification, including the National Labor Relations Act and other state wage and hour laws. As a result, employers must adhere to the relevant standards across federal, state, and local levels, ensuring compliance with the standard that provides the greatest protection to the worker.
The 2024 rule may create classification challenges for employers and will likely increase an already heavily litigated area by workers. Therefore, employers should review the 2024 rule carefully and update their classification policies and any independent contractor agreements accordingly.
If you have any questions regarding the content of this alert, please contact Michael Sciotti, partner, at msciotti@barclaydamon.com; Martine Wayne, associate, at mwayne@barclaydamon.com; or another member of the firm’s Labor & Employment Practice Area.