CSG Law Alert: DOL Issues New Final Rule on Employee and Independent Contractor Classification Under the FLSA

On January 10, in a continued effort to combat the common mistakes made regarding employee misclassification, the United States Department of Labor (the “DOL”) published a final rule clarifying when a worker must be classified as an employee versus an independent contractor under the Fair Labor Standards Act (“FLSA”).

This new final rule (the “2024 Rule”) rescinds a 2021 rule under which two key factors—opportunity for profit or loss and control over the work—carried greater weight than other factors in determining whether a worker should be classified as an employee or an independent contractor.

Under the 2024 Rule, which takes effect on March 11, 2024, employers must instead engage in an analysis that takes into account the totality of the circumstances and gives the following six factors equal weight in determining a worker’s proper classification:

  1. Opportunity for profit or loss depending on managerial skill;
  2. Investments by the worker and the potential employer;
  3. Degree of permanence of the work relationship;
  4. Nature and degree of control;
  5. Extent to which the work performed is an integral part of the potential employer’s business; and
  6. Skill and initiative.

The 2024 Rule applies to all workers, regardless of industry or type of work. The DOL has indicated the 2024 Rule differs from the prior 2021 rule in the following ways:

  • Returns to a totality-of-the-circumstances economic reality test, where no single factor or group of factors is assigned any predetermined weight;
  • Considers six factors (instead of five), including the investments made by the worker and the potential employer;
  • Provides additional analysis of the control factor, including a detailed discussion of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the nature and degree of control over a worker;
  • Returns to the DOL’s longstanding consideration of whether the work is integral to the employer’s business (rather than whether it is exclusively part of an “integrated unit of production”);
  • Provides additional context to some factors, including a discussion of exclusivity in the context of the permanency factor and initiative in the context of the skill factor; and
  • Omits a provision from the 2021 rule which minimized the relevance of an employer’s reserved but unexercised rights to control a worker.

Importantly, the 2024 Rule only revises the DOL’s interpretation of proper employee classification under the FLSA and has no effect on other laws that use different standards for employee classification.  By way of example, the Internal Revenue Code and the National Labor Relations Act have different statutory language and judicial precedent governing the distinction between employees and independent contractors. Additionally, the 2024 Rule has no effect on state wage and hour laws, like those in New Jersey, which rely on an “ABC” test examining three criteria to determine whether a worker is an employee or independent contractor: whether the worker is free from control or direction over the performance of the service the worker provides; whether the services performed by the worker are either outside of the enterprise’s usual course of business or performed outside of the places of business of the enterprise; and whether the worker is customarily engaged in an independently established trade, occupation, profession, or business.

The FLSA does not preempt any other laws that protect workers, so employers must comply with all federal, state, and local laws that apply to ensure that they are meeting whichever standard provides their workers with the greatest protections.

If you are an employer seeking guidance regarding employee classification, including but not limited to proper application of the DOL’s new rule, please contact your CSG Law attorney or the authors of this alert.

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