The U.S. Department of Labor (DOL) recently introduced a final rule, effective March 11, 2024, which redefines the classification criteria for distinguishing between independent contractors and employees under the Fair Labor Standard Act’s (FLSA) Classification provision.
According to the FLSA, employees are entitled to various benefits, including minimum wage, overtime pay, and other perks. On the other hand, independent contractors enjoy more flexibility in setting their schedules and can work for multiple companies at once.
The new rule replaces the 2021 Independent Contractor Rule and resembles the agency’s proposed rule from October 2022. It adopts a six-factor framework called the "totality-of-the-circumstances" approach to evaluate worker-employer relationships.
The factors taken into consideration are:
Use of Skill/Initiative: If the worker utilizes specialized skills similar to those required for managing a business, rather than merely performing a job, it supports independent contractor classification.
Criticality: If the tasks performed are not crucial to the employer’s business operations, the worker may be classified as an independent contractor.
Performance: If the employer controls the worker’s schedule, supervises work directly, or restricts the worker’s ability to work elsewhere, the worker may be considered an employee.
Permanence: This factor considers if the worker is hired on an as-needed basis, operates independently, and works for multiple companies, supporting the classification as an independent contractor.
Investments: It examines whether the worker or employer has made significant investments in equipment or resources resembling a business investment, which may indicate independent contractor status.
Profit/Loss: This factor assesses whether the worker can earn or lose money based on their ability to manage their work independently. Factors such as negotiating pay rates, accepting or declining work, managing work timing, and determining the order of work performed favor independent contractor status.
The term "independent contractor" refers to workers who are not economically dependent on the employer for work and operate their own businesses. They may also be referred to as freelancers, gig workers, or self-employed individuals.