Classifying an Individual as an Employee or Independent Contractor under the Fair Labor Standards Act: A New Rule from the Department of Labor

The Department of Labor (“DOL”) has published a new rule, effective March 11^th, that revises the guidance on how to analyze whether someone is an employee or independent contractor under the Fair Labor Standards Act (“FLSA”). The old rule (the 2021 Independent Contractor Rule) is being replaced with an analysis that is more consistent with how courts have historically interpreted the FLSA.

The new rule utilizes an “economic reality test” that looks to the facts of a situation as a whole to determine whether a worker is economically dependent on an employer. This economic reality test involves the use of a multi-factor test that businesses and workers should consider when assessing the economic realities of their relationship. The six factors put forth by the DOL in the new rule 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.

These factors should be examined as a whole; no one factor is controlling or dispositive, and the weight to give each factor may depend on the facts and circumstances of the particular relationship between an employer and a worker. Moreover, the six factors are not exhaustive. Additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.

Properly classifying a worker as an employee or independent contractor is important. If an employee is incorrectly classified as an independent contractor, the employer will be responsible for paying any unpaid wages owed to the employee under the FLSA. Additionally, the employer may have to pay liquidated damages in an amount equal to back wages, as well as civil money penalties. Employers may also have to pay attorneys’ fees associated with litigation.

If you have a worker, and you are trying to determine whether they should be classified as an employee or independent contractor for purposes of the FLSA, we are here to help! Reach out to us, and we will walk through the six factors of the economic reality test with you and help identify whether the individual should be classified as an employee or independent contractor.