A new rule from the U.S. Department of Labor is broadly expected to result in more workers being classified as “employees” under the Fair Labor Standards Act (FLSA). Although the final rule faces challenges in court, employers should be prepared for the rule on independent contractor classification to go into effect March 11, 2024. Employers should review their relationships with workers currently classified as independent contractors to determine if they should be re-classified as employees. Misclassification could result in significant liability for unpaid wages (including unpaid overtime), employee benefits, and unpaid employment and other taxes.
In distinguishing an employee from an independent contractor, the ultimate question under the rule is whether a worker is economically dependent on the potential employer for work or is in business for themselves. The 2024 rule adopts a totality-of-the-circumstances analysis and identifies six non-exhaustive factors relevant to this question.
- Opportunity for profit or loss depending on managerial skill. If the worker’s exercise of personal initiative, business acumen, or judgment affects the worker’s economic success or failure, the worker is more likely to be an independent contractor. Decisions that reflect managerial skill include negotiating the charge or pay for work provided, accepting or declining jobs, choosing the order or time in which jobs are performed, engaging in marketing or advertising to expand the worker’s business, and hiring others, purchasing materials, or renting space. Decisions that do not reflect the exercise of managerial skill include whether to work more hours or take more jobs when paid a fixed rate per hour or per job.
- Investments by the worker and the potential employer. A worker’s capital or entrepreneurial investments may indicate independent contractor status. Such investments typically support an independent business, for example, by increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach. If the worker is making investments similar to those of the potential employer (even if on a smaller scale), this suggests that the worker is operating independently as an independent contractor. The costs of a worker’s tools and equipment to perform a specific job or costs unilaterally imposed by the employer are not capital or entrepreneurial investments and indicate employee status.
- Degree of permanence of the work relationship. When the work relationship is definite in duration, non-exclusive, project-based, or sporadic, this factor weighs in favor of independent contractor status. Seasonal or temporary work that is limited by operational characteristics of the particular business or industry, however, is not necessarily indicative of independent contractor status unless the worker is exercising independent business initiative. When the work relationship is indefinite in duration, continuous, or exclusive of work for other employers, this factor weighs in favor of employee status.
- Nature and degree of control. The greater the potential employer’s control (including reserved control) over the worker and the economic aspects of the working relationship, the more this factor weighs in favor of employee status. Elements of control include setting the worker’s schedule, supervising the performance of work (including by technological means), reserving the right to supervise or discipline workers, placing restrictions on workers that do not allow them to work when or for whom they choose, setting prices or rates for services, and marketing the services or products provided by the worker. Actions taken in compliance with employment laws are not indicative of control, but actions by the potential employer that serve the potential employer’s own compliance methods, safety, quality control, or contractual or customer service standards may be indicative of control.
- The extent to which the work performed is an integral part of the potential employer’s business. When the work or function performed is an integral part of or critical, necessary, or central to the potential employer’s principal business, this factor weighs in favor of employee status. The focus is on the function of the work performed, not on any individual worker.
- Skill and initiative. When the worker uses specialized skills in connection with business-like initiative, this factor weighs in favor of independent contractor status. Mere possession of specialized skills, by itself, is not indicative of a worker’s status. It is the worker’s use of these specialized skills in connection with business-like initiative (i.e., to market the skills, generate new business, and obtain work from multiple companies) that indicates independent contractor status. When the worker lacks specialized skills or is dependent on training from the potential employer, this factor weighs in favor of employee status.
The above factors are not exhaustive. Additional factors may be relevant if they indicate whether a worker is in business for themselves or economically dependent on the potential employer for work. The new 2024 rule replaces a 2021 rule. In addition to eliminating the 2021 rule’s distinction between “core” and “lesser” factors, the 2024 rule added factor two and significantly redefined factors five and six. Given these changes, employers that relied on the 2021 rule to classify workers as independent contractors should re-evaluate them under the new rule. Consult with your legal counsel at Ice Miller for assistance in evaluating workers’ classifications and assessing your legal risks.
Editor’s Note: This article was written by Rachel Mattingly Phillips of the law firm Ice Miller and is published by AGC with permission. This is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances. For more information, contact Claiborne Guy at claiborne.guy@agc.org or 703-837-5382.