On January 9, 2024, the U.S. Department of Labor (“DOL”) announced a six-factor test to distinguish between employees and independent contractors under the Fair Labor Standards Act (“FLSA”). This rule took effect March 11, 2024. It replaces the 2021 proposed rule, which was put on hold and is under legal dispute in the 5th Circuit.
Proper classification has significant consequences. First, independent contractors do not receive the same safeguards as employees (for example, minimum wage and overtime protections). Additionally, misclassifying workers as independent contractors can result in substantial liability for employers.
The new final rule implements a six-factor test, which is more consistent with judicial precedent prior to 2021, to determine whether a worker is an independent contractor or an employee. The new test applies the following six factors:
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;
Extent to which the work performed is an integral part of the potential employer’s business; and
Skill and initiative.
These factors are not exhaustive. The test utilizes a totality-of-the-circumstances economic reality approach, which “in some way indicate whether the worker is in business for themself.”1 If the worker is dependent on the employer for work, the worker is not an independent contractor.
Some states, like California, utilize the “ABC Test” to determine whether a worker is an independent contractor or an employee. Under this test, a worker can only be classified as an independent contractor if all three of the following criteria are satisfied:
The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
The worker performs work that is outside the usual course of the hiring entity’s business; and
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
The new DOL six-factor test differs from the ABC test. Rather than creating a brightline test where every factor must be met, the DOL opted for the longstanding multifactor “economic reality” test used by courts. This test considers various factors collectively where no one factor is determinative.
The DOL specified that the new final rule only revises the Department’s interpretation under the FLSA. The final rule has “no effect on other laws—federal, state, or local—that use different standards for employee classification,” including states such as California, Illinois, Massachusetts, New Hampshire, or New Jersey, which use the ABC Test.2
While there is some uncertainty due to pending litigation, employers should still assess how the new rule impacts existing and future independent contractor arrangements. California employers who rely heavily on independent contractors should conduct an audit using the new six-factor test to ensure compliance as well as the ABC test. In most situations, a contractor relationship that meets the ABC test will also meet the “economic reality” test as well, but they are independent tests and should be considered independently. Regardless, employers should bear in mind that the law generally assumes workers are employees, and the burden is generally on employers, at time by way of statutory presumption, to demonstrate that independent contractors are lawfully classified.
The lawyers at Palmer Kazanjian Wohl Hodson LLP are ready and able to answer your legal questions, recommend best practices, and help your business comply with these new requirements.
1 See 29 C.F.R. §795.110(b)(7)
2 See 29 U.S.C. 218