On January 10, 2024, the U.S. Department of Labor (DOL) published its final independent contractor rule in the Federal Registrar in an attempt to provide greater clarity and consistency on how to classify a worker as an employee or independent contractor under the Fair Labor Standards Act (FLSA).

For decades, federal courts have analyzed the question using a multifactor, totality-of-the-circumstances economic reality test, with no factor or factors being dispositive. However, a rule that was published on January 7, 2021, known as the 2021 IC Rule, set forth “core factors” where some factors should be given additional weight over others. The 2021 IC Rule was criticized for not being supported by the DOL’s historical position and not fully aligned with the FLSA’s text.

The new final rule rescinds the 2021 IC Rule and adopts a six factor test focused on the economic reality, which is fairly closely aligned to federal circuit court decisions. The six economic reality factors to consider when classifying a worker are:

  • The worker’s opportunity for profit or loss
    • Examine whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work
  •  The investments by the worker and the potential employer
    • Examine the qualitative nature of the worker’s investments to the potential employer’s investment
  • The degree of permanence of the work relationship
    • Examine exclusivity of the worker’s relationship
  •  The nature and degree of the potential employer’s control
    • Examine whether the potential employer goes beyond legal requirements for its own convenience
  • The extent to which work performed is an integral part of the potential employer’s business; and
    • Examine whether the work is critical, necessary, or central to the business
  •  The worker’s skill and initiative
    • Examine whether the worker uses specialized skill in connection with business like initiative

The DOL adds that these six factors are not exhaustive and potential employers may consider additional factors if they are relevant to the overall question of economic dependence.

The DOL considered feedback from stakeholders in forums held in the summer of 2022 and during the commentary period. Notably, the new final rule does not adopt the very broad three-factor test, known as the ABC test, which is utilized in many state courts such as California, Connecticut, Maryland, Massachusetts, and New Jersey. The final rule is scheduled to go into effect on March 11, 2024.

Potential employers, especially those with gig workers, should review the final rule carefully and be ready to revise classification policies and procedures to ensure compliance as quickly as possible. For more information or questions on how the final rule may impact your business and Human Resources, please contact your experienced attorneys at Reed Smith.