The U.S. Department of Labor (DOL) published its final rule on independent contractor classification consisting of a six-part “economic reality” test and formally repealed the 2021 “core factors” test. The final rule is to become effective on March 11, 2024.
The repealed core factors test prescribed a five-factor test to guide the analysis, two of which were designated as “core factors” carrying more weight in the inquiry: 1) nature and degree of control over the work, and 2) the worker’s opportunity for profit or loss.
The new six-factor economic reality test looks broadly to the “totality of the circumstances” to determine whether a worker is generally considered an independent contractor (IC) or employee (E) under the Fair Labor Standards Act (FLSA).
- Opportunity for profit or loss depending on managerial skill
- E: a worker has no opportunity for profit or loss
- IC: worker has the ability to negotiate job pay and/or timing of work
- Investments by the worker and the potential employer
- E: investments/costs imposed by a potential employer
- IC: investments/costs increase a worker’s ability to do more or different types of work or extend market
- Degree of permanence of the work relationship
- E: exclusive, indefinite, or continuous work relationships
- IC: non-exclusive, sporadic and project-based work
- Nature and degree of control
- E: business maintains the ability to control performance and all economic aspects of the relationship, scheduling, supervision, and/or rates (Note: supervision may be imposed through the use of tracking or remote monitoring technology) and need not be in-person
- actions taken by a business to comply with specific, applicable laws or regulations are not indicative of control; however, if the actions serve the business’s “own compliance methods, safety, quality control, or contractual or customer service standards,” such actions are more indicative of control
- Extent to which the work performed is an integral part of the employer’s business
- E: when the work is critical, necessary, or central to the business
- the key question is whether the work or function performed is integral to the business, not whether the individual worker is an integral part of the business
- Skill and initiative
- E: a worker is dependent on training from the business to perform the work
- IC: a worker is using his or her specialized skills and taking business-like, entrepreneurial initiative to advance his or her independent business.
- IC: a worker possesses specialized skills and demonstrates entrepreneurial judgment (Note: specialized skill alone is not sufficient, but must be used in connection with business-like initiative)