On January 10, 2024, the U.S. Department of Labor (“DOL”) issued its Final Rule for determining whether a worker is properly classified as an independent contractor under the Fair Labor Standards Act (“FLSA”). The Final Rule is set to take effect on March 11, 2024. According to the DOL, the new rule is in line with the economic realities test developed by courts over decades. Under this Final Rule, the ultimate inquiry is whether, as a matter of economic reality, the worker is economically dependent on the employer for work (and is thus an employee) or is in business for themself (and is thus an independent contractor). This inquiry is based on a totality of the circumstances, with no one factor having more weight than the others.

The Final Rule rescinds an independent contractor rule issued under former President Donald Trump that focused more narrowly on only two factors of the economic realities test. The DOL made clear that this Final Rule does not adopt the ABC test, which is a test used by several states, including California. The ABC test, which requires workers to meet three enumerated elements to be classified as independent contractors, is more difficult to satisfy and favors a finding that a worker is an employee.

The Final Rule’s six factors include: (1) a worker’s opportunity for profit or loss; (2) investments made by the worker and the potential employer; (3) the degree of permanence of the work relationship; (4) the degree of control an employer has over the work; (5) the extent to which work performed is integral to the employer’s business; and (6) the use of a worker’s skill and initiative. Additional factors may be considered if they are relevant to the question of economic dependence.

The DOL discussed each factor in depth. With the first factor, the DOL set forth a list of facts that may be relevant, including whether the worker can negotiate the pay for the work, whether the worker can choose to decline a job, or whether the worker hires others and purchases materials and equipment. For the second factor, it should be considered whether the costs incurred by the worker generally support a separate business, or whether they are just tools or equipment to perform work. For the third factor, a non-exclusive or project-based job, as opposed to an indefinite assignment, would weigh in favor of the worker being an independent contractor. For the fourth factor, the focus is on the nature and degree of control exerted by the potential employer, rather than the control exerted by the worker. For the fifth factor, the DOL considers whether the potential employer could function without the service performed by the worker. Finally, with the sixth factor, the DOL explained that a worker who lacks specialized skills is likely an employee under the test; however, the ultimate question for this factor is whether the worker uses their specialized skills in connection with a business-like initiative.

While not controlling, the DOL’s new Final Rule can be cited as persuasive authority for federal courts considering classification issues. It sets forth the DOL’s current (and more pro-employee) interpretation of prior court decisions on the subject. Because the Final Rule explicitly does not adopt the ABC test, it is of limited value as authority in California.

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About The Author

Tyler J. Johnson is an associate in Sheppard Mullin’s Labor and Employment Practice Group in the firm’s Los Angeles office. Mr. Johnson represents employers in every stage of the litigation process, from prelitigation disputes to class certification hearings and trials. He represents businesses of every size, and has extensive experience in the healthcare, agricultural, fashion, and temporary staffing industries. Tyler defends employers against claims of discrimination, harassment, and retaliation, and has prevailed at trial in a pregnancy discrimination case. Tyler also routinely represents businesses in complex litigation, including proposed class actions and representative actions under the Private Attorneys General Act. Tyler has defeated class certification in a number of cases and frequently obtains summary judgment for employers.

He has written a number of articles for the Sheppard Mullin Labor and Employment Blog and is a contributing author of the ALERT Newsletter.

Mr. Johnson received his law degree from the Pepperdine Caruso School of Law and his undergraduate degree from University of Maryland.