iWhat is an independent contractor versus an employee? You may think you know the answer, but there likely are more staff members who are really employees, rather than independent contractors.
In 2021, the Trump Administration moved away from the “totality of the circumstances” analysis to define an independent contractor and simplified the test. However, on January 10, 2024, the U.S. Department of Labor published a Final Rule under the Fair Labor Standards Act (FLSA or Act) pivoting to pre-2021.
Factors in the Final Rule
According to the Final Rule:
“The Act’s [FLSA’s] definitions are meant to encompass as employees all workers who, as a matter of economic reality, are economically dependent on an employer for work. A worker is an independent contractor, as distinguished from an ‘employee’ under the Act, if the worker is, as a matter of economic reality, in business for themself. Economic dependence does not focus on the amount of income the worker earns, or whether the worker has other sources of income.”
The test reinstates 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
- Whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative.
The new Final Rule is open to additional factors relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA. In sum, the focus is now back on the control factors (including scheduling, supervision, price-setting and the ability to work for others). No single factor is determinative.
Caveat for Employers
Based on the reinstatement of the prior test to define an independent contractor, every employer should audit those classified as “independent contractors” to avoid potential misclassification claims. Such claims can be brought individually or through class actions by misclassified personnel and involve substantial awards for actual damages, liquidated damages and attorneys’ fees. Simply put, independent contractors hired under the 2021 Independent Contractor Rule and working in compliance with the Fair Labor Standards Act for the past several years, may now be out of compliance.
