CLIENT ALERT: The Department of Labor Announces Final Rule on Independent Contractors

On January 9, 2024, the U.S. Department of Labor (the Department) announced a final rule regarding independent contractor classification that will take effect on March 11, 2024.  This final rule addresses how to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA).  The FLSA requires covered employers to comply with minimum wage, overtime pay, recordkeeping, and youth employment standards for their employees. Independent contractors, who are in business for themselves, are not entitled to these benefits, and generally have more flexibility and freedom to set their own schedules and work for multiple companies.  Misclassifying a worker as an independent contractor rather than an employee can subject an employer to potential liability for back wages and penalties.   

The final rule adopts a six-factor, totality-of-the-circumstances framework for evaluating independent contractor status, focusing on:

• Opportunity for profit or loss depending on managerial skill,
• Investments by the worker and the potential employer,
• Degree of permanence of the work relationship,
• Nature and degree of control,
• The extent to which the work performed is an integral part of the potential employer’s business, and
• The use of the worker’s skill and initiative.

The totality-of-the-circumstances or “economic realities” analysis evaluates “economic dependence,” meaning that the final rule anticipates that workers should be classified as employees rather than contractors when they are “economically dependent” on a company.  The final rule provides detailed guidance and additional context on how to apply each of the six factors, including a discussion of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the nature and degree of control over a worker.  Although different factors may be more or less relevant depending on the facts of each individual case, the final rule does not categorically weigh certain factors more than others in every case, as compared to the 2021 Independent Contractor (IC) Rule, which focused narrowly on just two factors of the economic realities test. The final rule rescinds the 2021 rule. 

The final rule framework can be applied to workers in any industry and will be accessible in the Code of Federal Regulations.  The Department believes that the final rule will reduce the risk that employees are misclassified as independent contractors. 

If you have questions about the final rule on independent contractors, please contact the Labor and Employment Team at Potter Anderson: Jennifer Gimler Brady, Kathleen Furey McDonough, Lauren E.M. Russell and Jennifer Penberthy Buckley).

**We thank our colleague, Lisa Dang, for her contributions in preparing this Client Alert. 

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