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The Department of Labor Publishes Issuance of the Final Rule Defining Employee or Independent Contractor Classification

The Department of Labor, on January 10, 2024, published the issuance of the final rule (“Rule”) defining Employee or Independent Contractor Classification under the Fair Labor Standards Act (“FLSA”).

The Rule states that a worker is not an independent contractor if s/he is, as matter of economic reality, economically dependent on an employer for work. The Rule is effective on March 11, 2024.

The Rule applies the following six factors to analyze employee or independent contractor status:

(1) opportunity for profit or loss depending on managerial skill – The following facts, among others, can be relevant: 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 their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space;

(2) investments by the worker and the potential employer – This factor considers whether any investments by a worker are capital or entrepreneurial in nature;

(3) degree of permanence of the work relationship – This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration, continuous, or exclusive of work for other employer ;

(4) nature and degree of control – This factor considers the potential employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship;

(5) extent to which the work performed is an integral part of the potential employer’s business – This factor weighs in favor of the worker being an employee when the work s/he performs is critical, necessary, or central to the potential employer’s principal business; and

(6) skill and initiative – This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work. .

No factor or set of factors among this list of 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 him/herself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work (i.e., an employee under the FLSA).

Note that a person can be an “independent contractor” under IRS rules (https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee ) but still be an “employee” under the FSLA.

Potential penalties: If an employee is incorrectly classified as an independent contractor, the employer will be responsible for paying any unpaid wages owed to the employee under the FLSA. Additionally, the employer may have to pay liquidated damages in an amount equal to back wages, as well as civil money penalties. Employers may also have to pay attorneys’ fees associated with litigation.

See the Rule here: https://www.federalregister.gov/documents/2024/01/10/2024-00067/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act

See the FAQs here: https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking/faqs

See the Compliance Guide here: https://www.dol.gov/agencies/whd/government-contracts/small-entity-compliance-guide