The U.S. Department of Labor (DOL) has issued a new regulation on the classification of workers as employees or independent contractors which will go into effect on March 11, 2024. The DOL believes this final rule will help businesses and workers address misclassification under the Fair Labor Standards Act (FLSA or Act) by applying an “economic reality test.”
In applying this test, the DOL regulations consider the totality-of-the-circumstances across multiple factors noting no one factor has a “predetermined weight.” All of the following should be considered in the assessment:
• The worker’s opportunity for profit or loss and exercise of managerial skill;
• The financial stake or investments made by the worker and the potential employer;
• The degree of permanence of the relationship;
• The degree of control the employer has over the work;
• The essential nature of the person’s work to the employer’s business; and
• The use of a worker’s skill and initiative.
Background on the Fair Labor Standards Act
Since the 1940s, the DOL has applied an economic reality test to determine whether a worker is an employee or an independent contractor under the FLSA. The consideration has been a matter of economic reality for the worker – is the worker economically dependent on the employer for work or in business for themself. The FLSA requires covered employers to pay nonexempt employees at least the Federal minimum wage for all hours worked and at least one and one-half times the employee’s regular rate of pay for every hour worked over 40 in a workweek. The Act also requires covered employers to maintain certain records regarding employees and prohibits retaliation against employees who are discharged or discriminated against after. These FLSA’s protections do not apply to independent contractors.
Additional resources
Employee or independent contractor? DOL issues new guidance – Journal of Accountancy
Employee or Independent Contractor? A Guide to the New Rule | U.S. Department of Labor Blog (dol.gov)
Federal Register: Employee or Independent Contractor Classification Under the Fair Labor Standards Act