Independent contractors are not covered by the minimum wage and overtime requirements of the federal Fair Labor Standards Act (FLSA). But who is an independent contractor? This question has vexed businesses for generations, due in no small part to the various tests applied under different state and federal laws to assess this seemingly basic question. The growth of the "gig economy" over the past decade and the proliferation of services reliant upon an independent contractor-based business model have made clarity on this issue more important—and elusive—than ever before. A new final rule from the U.S. Department of Labor, effective March 11, 2024, attempts to solidify the inquiry, at least as it relates to federal wage and hour law.
For many years, the distinction between "employees" (who are eligible overtime pay under the FLSA) and "independent contractors" (who are not) has been a question decided by courts. Those courts often apply what has become known as the "economic realities test," which identifies independent contractors not by tax status, labels in a contract, or a worker's title, but by the specific nature of the working relationship at issue.
The Department of Labor's new rule codifies the agency's interpretation of the economic realities test with the stated aims of promoting uniformity among courts applying the test and revising a 2021 rule that it determined improperly applied the test.
A guiding principle for the new regulation is that an "employee"—as opposed to an independent contractor—is a worker who "as a matter of economic reality, [is] economically dependent on an employer for work." An independent contractor, by contrast, is a worker who "is, as a matter of economic reality, in business for himself."
Attempting to flesh out the principle of economic dependence, the new rule includes six factors meant to help employers and courts review, under the totality of the circumstances, the economic reality of a given working relationship: (1) whether a worker has an opportunity for gain or loss on the basis of managerial skill (e.g., whether a worker may choose to accept or decline jobs and makes decisions to hire others or purchase materials); (2) whether the worker must invest capital in an entrepreneurial manner to develop business and skills; (3) the degree of permanence in a relationship; (4) the nature and degree of control that the supposed employer has over a worker's schedule, means of work, and ability to work for others; (5) the extent to which an individual's work makes up an "integral part" of the alleged employer's business or is merely ancillary; and (6) whether a worker uses specialized skills and initiative to complete his or her tasks, independent of training provided by the alleged employer itself.
The regulations further state that these six factors are not exhaustive. Depending on the circumstances, other factors may be relevant to the ultimate determination of whether workers are truly in business for themselves—and are therefore independent contractors—or are economically dependent on an alleged employer for work. The 2021 rule stated that a worker's "opportunity for gain" and the "nature and degree of control" over their work were "core factors" that weighed more heavily than the others. But the new rule pivots by specifying that no one factor is necessarily more important than the others: each factor must be assessed in the context of a specific relationship considered as a whole.
Frequent changes to the Department of Labor's approach, and the presence of alternate tests for purposes of IRS tax treatment and state discrimination laws, among others, makes one thing clear: a wholistic, case-by-case analysis is critical when non-employee workers' status is at issue. Businesses engaging independent contractors can no longer rely on the 2021 rule's "core factors" as determinative of the relationship because other factors—including factors not specifically listed in any rule—may be more relevant in certain circumstances. No single regulation on this topic can resolve all possible questions, and the new rule provides little hope that the number of FLSA misclassification disputes will diminish any time soon.
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