Department of Labor Issues New “Employee” v. “Independent Contractor” Test

On January 10, 2024, the Department of Labor (DOL) published a new rule that went into effect on March 11, 2024.  A copy of the new Rule can be viewed here: Federal Register :: Employee or Independent Contractor Classification Under the Fair Labor Standards Act.

This new rule adopts a six-factor test to determine whether a worker is an employee or an independent contractor. This distinction is important because employees are afforded more employment protection under state federal law, such as the Fair Labor Standards Act (“FLSA”).

The DOL describes its new six factor test as an “economic reality” because the factors examine the realistic economic relationship between the worker and the employer. The six factors of the economic reality test are:

Factor 1: Opportunity for profit or loss depending on managerial skill

1. • This factor looks at the control the worker has over the job. For example whether the worker can meaningfully negotiate the charge or pay for the work provided; whether the worker has the discretion to accept or decline jobs or the opportunity to choose 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. The more discretion the worker has over the work, the more likely the worker is an independent contractor as opposed to an employee.

1. • If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee.

1. • Some decisions by a worker that can affect the amount of pay that a worker receives, such as the decision to work more hours or take more jobs, generally does not reflect the exercise of managerial skill that would indicate the worker was an independent contractor under this factor.

Factor 2: Investments by the worker and the potential employer

1. • This factor considers whether any investments by the worker are capital or entrepreneurial in nature. In other words, if the investments are made to support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach. If so, that would tend to show that the worker was an independent contractor.
   • Costs covered by a worker to perform their job, such as “tools and equipment to perform specific jobs and the worker’s labor,” “are not evidence of capital or entrepreneurial investment and indicate employee status. §795.110(B)(2)

Factor 3: Degree of permanence of the work relationship

1. • If the work relationship is indefinite in nature this indicates the worker is an employee.

1. • If the work relationship is definite, or limited in duration or project-specific, this indicates the worker is an independent contractor.

Factor 4: Nature and degree of control

1. • The more control an employer has over a worker, the more likely the worker is an employee. Some things that tend to show the type of control typical between an employer and an employee include control over scheduling, supervision over the performance of the work, and an employer’s requirement that a worker comply with safety or health standards beyond what is required by federal, state, or local law and regulation, such as an employer’s own quality control or safety compliance requirements.

Factor 5: Extent to which the work performed is an integral part of the potential employer’s business

1. • If the work performed by the worker is critical, necessary, or central to the employer’s principal business this would indicate employee status.

Factor 6: Skill and initiative

1. • The factor looks at whether the worker uses specialized skills to perform the work. If a worker does not use specialized skills in performing the work, or where the worker is dependent on training from the employer to perform the work, this indicates employee status.

According to the DOL, “economic dependence is the ultimate inquiry.” This means that if the worker is in reality in business for himself, then he is an independent contractor.

If you are a worker who has been misclassified as an independent contractor, you may be entitled to recover unpaid wages from a past or current employer.  Remember, there are time limits within which actions must be brought—don’t miss your chance to recover wages you’ve already earned.

ADVERTISING ONLY: The information on this blog is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

Past results obtained by Biller & Kimble, LLC are no guarantee of future results. Each case or matter is different and must be judged on its own merits.