DOL Issues Final Rule on Employee/Independent Contractor Classification

On January 9, 2023, the DOL announced its final rule on worker classification for purposes of the Fair Labor Standards Act (FLSA).

The FLSA became law in 1938 and established the federal minimum wage, overtime pay requirements, and other protections for employees. However, the FLSA defines “employee” very generally as “any individual employed by an employer.” Accordingly, a multifactor test eventually emerged in the federal courts to determine whether a worker was an employee subject to the FLSA or, in the alternative, an “independent contractor,” to whom FLSA protections would not apply.

The DOL ultimately adopted a substantially similar version of this test – called the “economic realities” test – which applied six factors, equally weighed, to the question of worker classification:

1. The opportunity for profit or loss depending on managerial skill
2. Investments by the worker and the employer
3. The permanence of the work relationship
4. The nature and degree of the worker’s control over the work
5. Whether the work performed is integral to the employer’s business
6. The worker’s skill and initiative

In early January 2021, the DOL under President Trump issued regulations identifying just two of these – control over the work and the opportunity for profit and loss – as the two “core” factors for classifying workers, with other factors playing a secondary role in the analysis at best.

Set to go into effect on March 11, 2024, this new rule rescinds and replaces this “core factor” rule with the six-factor “economic realities” test, essentially restoring the traditional framework for worker classification used for decades before 2021.

While this change applies to the determination of employee status under the FLSA, there is an indirect yet still significant impact on similar analyses undertaken by employee benefit plans for purposes of determining employee status under ERISA or the Internal Revenue Code (e.g., for determining employer shared responsibility penalties) which also generally employ multifactor standards similar to that reinstated by the DOL for purposes of FLSA application. Employers should be aware of the issuance of the final rule and consult with employment law counsel if they have any concerns regarding the proper classification of their workers.

Federal Register: Public Inspection – Combined Filings »
Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA) »