DOL Issues New Regulations for Independent Contractors

On January 9, 2024, the Department of Labor announced the final regulations on the issue of independent contractors under the Fair Labor Standards Act (“FLSA”). Briefly, the FLSA is the law that covers overtime pay for employees. Now, the statute itself does not set out a definition of an independent contractor.  Rather, employers rely on the federal regulations that accompany the statute to explain the definition of an independent contractor.   The new regulations announced on January 9, 2024, become effective on March 11, 2024.  It follows that from this time period until March 11, 2024, the old test applies.  Then beginning on March 11, 2024, the new test applies.

OLD TEST

Let’s take a look at the “Old Test.” The old regulations that were effective in January of 2021 and remain in effect until March 10, 2024.  were withdrawn and then tied up in litigation.  The factors for the old standard relate to the extent the Independent Contractor (“IC”) relied on the employer for work. In order evaluate economic dependence, two factors (“Core Factors”) are considered: (1) the nature and degree of the control over the work, and (2) the individual’s opportunity for profit and loss. 

Much emphasis is put on these two Core Factors. However, other factors considered, after the Core Factors are: (1) the amount of skill required for the work, (2) the degree of permanence of the relationship, (3) whether the work is an integral part of the production, and (4) any other factors.

NEW TEST

The new Independent Contractor test comes into effect March 11, 2024.  This rule embraces an balancing test known as the Economic Realities Test.  For this test, there is no dispositive factor. Rather, it is a balancing test of the various factors. Below are the factors:

  • Opportunity for Profit or Loss Depending on Managerial Skill.   Part of this analysis is (1) whether the individual can meaningfully negotiate the amount of money charged for the services, (2) whether the individual chooses the order and/or time in which the jobs are performed, (3) whether the individual engages in marketing, advertising and the like for the company.

  • Investments by Worker and Employer.  Asses how much investment the individual makes into their own enterprise. 

  • Degree of Permanence of the Work Relationship.  There is a good case for an Independent Contractor when the relationship is for a definite term, non-exclusive, project based or sporadic.

  • Nature and Degree of Control.  The following is reviewed when assessing this factor: (1) whether the business sets the worker’s schedule, (2) whether the business supervises the performance of the work, or (3) whether the business explicitly limits the individual’s ability to work for others. 

  • Extent to Which the Work Performed is an integral Part of the Business.  The issue here is whether the function of the individual is an integral part of the business.  Individuals who perform a service that is (1) critical, (2) necessary, (3) or central to the businesses’ principal business most likely are deemed employees.

  • Skill and Initiative.  Here, we assess does the worker bring a specialized skill to the business or does the individual rely on the business for training.

 THOUGHTS FOR BUSINESSES

Mindful businesses will review their independent contractor agreements through the lens of the Economic Realities Test. Misclassification of independent contractors exposes businesses to damages and penalties.

 


Susie Cirilli