Recently, on January 10, 2023, the U.S. Department of Labor issued Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act, RIN 1235-AA43 (the “Final Rule”), which lays out the new framework to be utilized by organizations when analyzing whether a worker should be classified as an “employee” or an “independent contractor” under the Fair Labor Standards Act (“FLSA”). As stated by the DOL in its recent Small Entity Compliance Guide, “[t]he FLSA is a federal law that establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time employees in the private sector and in federal, state, and local governments…[with] significant penalties against organizations that fail to properly classify their employees”. With the FLSA providing multiple employee protections and significant penalties for organizations in non-compliance, both organizations and workers need to understand the Final Rule’s workers’ classification evaluation framework.
Before looking at the Final Rule’s classification evaluation framework, it is important to note that the FLSA does not define an “independent contractor.” As such, the courts over the years have developed and utilized their own economic reality analysis in determining whether a worker is either (i) an employee dependent on the employer for work or (ii) an independent contractor in business outside of the employer. Similarly, as stated by the DOL, the Final Rule applies its own economic reality test based on consideration of the following six factors:
“To analyze if a worker is an employee or independent contractor…six factors that businesses and workers should consider when analyzing the economic realities of the working relationship [are]:
(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.
No one factor or subset of factors determines if a worker is an employee or independent contractor. Rather, all the circumstances of the relationship should be examined. The weight given to each factor may depend on the facts and circumstances of the particular relationship. Also, additional factors may be relevant if they in some way indicate if the worker is in business for themself as opposed to being economically dependent on the employer for work.”
In closing, with the Final Rule’s new six-factor Economic Reality Test required by the DOL to be applied by organizations when classifying workers and the significant penalties for organizations in non-compliance with the FLSA, it is imperative that organizations: (i) review their current onboarding processes to ensure their workers are properly classified – as employees or independent contractors and (ii) seek legal advice, as needed, regarding classification issues and questions.