DOL Releases Final Rule on Independent Contractors
By Stephanie Dorning, JD, Employment Law Counsel
Published January 16, 2024
On January 9, 2024, the U.S. Department of Labor (DOL) released their updated final rule on employee classification under the Fair Labor Standards Act (FLSA). The rule, going into effect on March 11, 2024, replaces the 2021 “ABC” rule, and establishes a six-factor “economic realities” test for determining whether an individual is an employee or an independent contractor.
The DOL identifies the following six factors for determining whether a worker qualifies as a bona-fide independent contractor under the new rule.
- 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.
- Skill and initiative.
The above factors are non-exhaustive, meaning additional information may be used in the analysis, if relevant. Additionally, unlike the rescinded 2021 Rule, this test takes a more holistic approach, and no single factor in the analysis carries more weight than another. The full circumstances of the work environment must be evaluated when determining whether a worker is economically dependent on the employer or if they are operating as a truly independent business operation.
While this rule is like the economic realities test used by the DOL prior to 2021, it includes several provisions expanding on that test. The new rule limits the “nature and degree of control” by the principal to actions that are performed for the “sole purpose of compliance.” Any additional control exercised by the principal may be considered in favor of an employment relationship. The rule also reframes the “integral” nature of a potential contractor’s work, removing the focus from the worker as an individual and focusing on whether the work performed is “critical, necessary, or central” to the principal business.
Under this new rule, some individuals who were classified as independent contractors under the 2021 regulations may need to be classified as employees, with all the requisite recordkeeping, minimum wage, and overtime obligations. Now is a good time to evaluate your current contractor relationships considering this new guidance. Remember, however, that Illinois employers must also meet the Illinois Department of Labor’s test in order to classify someone as an independent contractor, which does vary from the federal rule.
HR Source members seeking more information about this new rule or employment classification issues can contact us at the HR Hotline Online or at 800-448-4584.