The United States Department of Labor (“DOL”) has continued the implementation process for its adoption of a new federal standard for determining questions of independent contractor status under federal law. On January 10, 2024, the DOL published a final rule that revises the DOL’s past guidance on how to analyze independent contractor issues under the Fair Labor Standards Act (“FLSA”).
The final rule largely tracks the DOL’s October 2022 proposed rule. It specifically retains the multifactor, “totality-of-the-circumstances” framework for analyzing independent contractor status included in that proposal. Under this framework, the DOL will consider six non-exhaustive factors when examining the relationship between a worker and a potential employer, including:
- Worker’s opportunity for profit or loss.
- Investments made by the worker and the employer.
- Degree of permanence of the work relationship.
- Nature and degree of control over performance of the work.
- Extent to which the work performed is an integral part of the employer’s business; and
- Use of the worker’s skill and initiative.
The final rule was published in the Federal Register on Wednesday, January 10, 2024, and is expected to take effect March 11, 2024. When it goes into effect, independent contractor issues under the FLSA will need to be examined under this new framework that will require an analysis of how each of the foregoing characteristics impact the overall relationship to decide if there is either employment or instead independent contractor status. The DOL believes that this new standard is more consistent with how courts have interpreted this issue in the past, while also providing a more consistent approach for companies that engage with individuals who are in business for themselves.
When it comes to creating independent contractor relationships, it is important that companies are aware of not only this new rule, but also any other standards applied under state wage and hour laws. If state standards are more favorable to workers than this new federal rule, the state standard takes priority and must be followed. Some states like New Jersey have a more difficult standard that must be met, known as the ABC Rule, in deciding worker classification issues. Under the ABC Standard applied here in New Jersey, an independent contractor relationship is established only if each of the foregoing requirements are met:
- The individual has been and will continue to be free from control or direction over the performance of work performed, both under contract of service and in fact; and
- The work is either outside the usual course of the business for which such service is performed, or the work is performed outside of all the places of business of the enterprise for which such service is performed; and
- The individual is customarily engaged in an independently established trade, occupation, profession, or business.
The failure to meet any one of these prongs means that, rather than having an independent contractor, you have an employee who is entitled to all the usual available benefits that are applicable to such persons under state wage and hour laws.
While the new federal standard under the recently announced final rule seemingly provides greater flexibility in analyzing independent contractor issues under federal law, companies will face significant legal peril if they stop their analysis of this issue prematurely just at this federal rule while ignoring companion state wage and hour standards. Accordingly, it is important to remember in this area of the law to analyze independent contractor questions under both federal and state rules to avoid possible employee misclassification issues.
