Employee or Independent Contractor? DOL Issues Final Rule

In December 2022, we published a blog post about the Department of Labor’s (DOL) proposed changes to the Fair Labor Standards Act (FLSA) and the rules controlling whether a worker is considered an employee or an independent contractor. See; Proposed Changes to the Fair Labor Standards Act: Employee or Independent Contractor? The DOL has now issued its final rule. Here’s what that means for workers.

Why does it matter how a worker is classified?

The FLSA is an important law related to worker’s rights that establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting most workers. The FLSA generally requires that covered employers pay nonexempt employees at least the Federal minimum wage for every hour worked, and at least one and one-half times the employee's regular rate of pay for all hours worked beyond 40 in a workweek.

The question whether a worker should be classified as an independent contractor or an employee is important because of the increase in the gig economy following the COVID pandemic and the changes it brought to how, where and when employees work. Worker classification under the FLSA impacts a worker’s pay and benefits because independent contractors are not subject to the minimum wage and overtime requirements of the FLSA. While independent contractors are an important part of the economy, the courts and the DOL have often been inconsistent in determining how to classify workers.

The DOL’s Final Rule is intended to protect workers.

The DOL published its final rule on January 10, 2024. The new rule is intended to help employers and workers better understand when a worker qualifies as an employee and when they may legally be considered an independent contractor under the FLSA. The rule provides guidance on proper classification and seeks to combat employee misclassification, a serious problem that impacts workers’ rights to minimum wage and overtime pay, facilitates wage theft, and hurts the economy at-large. As Acting Secretary of Labor Julie Su explained:

Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections. This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.

What makes a worker an “employee” vs. “independent contractor”?

The new “independent contractor” rule restores the multifactor analysis used by courts for decades, ensuring that all relevant factors are analyzed to determine whether a worker is an employee or an independent contractor. The rule addresses six factors that guide the analysis of a worker’s relationship with an employer, including:

  • any opportunity for profit or loss a worker might have;
  • the financial stake and nature of any resources a worker has invested in the work;
  • the degree of permanence of the work relationship;
  • the degree of control an employer has over the person’s work;
  • whether the work the person does is essential to the employer’s business; and
  • a factor regarding the worker’s skill and initiative.

The final rule is set to go into effect on March 11, 2024. But the rule is already facing legal challenges so its enforcement by the DOL and the courts may be delayed.

The attorneys at FMR are following these developments closely and will be monitoring the start date for the new rule as well as legal challenges that may delay its enforcement.

For more information on the final rule see:

Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act, RIN 1235-AA43

Employee or Independent Contractor Classification Under the Fair Labor Standards Act