Employee or Independent Contractor: The U.S. Department of Labor's New Rule Clarifies the Distinction

March 19, 2024

Topics: Independent Contractors

Many companies wrestle with whether to classify someone providing services to the company as an employee or independent contractor. While sometimes it may seem more convenient or cost-effective to classify service providers as contractors, if challenged, the cost and headache of defending a misclassification claim could far outweigh the possible savings.

The federal Department of Labor (“DOL”) recently issued a new rule regarding which individuals can be properly classified as independent contractors under the Fair Labor Standards Act (the “FLSA”). The FLSA outlines which employees receive minimum wage and overtime pay, among other wage and hour concerns. Employees enjoy the benefits and protections of the FLSA, but independent contractors do not.

The new rule went into effect on March 11, 2024. It has been challenged in the courts, but regardless of what ultimately happens, this reflects a trend across the country, led by states like California and New Jersey, making it more difficult to legally classify workers as independent contractors.

The DOL’s New Rule: How It Works

Determining whether an individual is properly classified as an independent contractor or employee under the FLSA has always required a fact-intensive analysis. The new rule clarifies that the analysis should focus on the economic reality of the relationship between the parties.
More specifically, the new rule requires an evaluation of 6 main economic factors, including:

  • Opportunity for profit or loss
    -  Does the service provider have the skill and ability to control how much they earn in this arrangement?
    -  Are they free to meaningfully negotiate the fee, accept or decline jobs, engage in marketing to expand their customer base, and secure additional work from other customers or clients?
  • Investments made by the parties
    -  Who has invested in the necessary tools and equipment to perform the services?
    -  Has the service provider made capital or other investments in their business?
    -  Is the service provider expanding an independent business?
  • Degree of permanence of the relationship
    -  Is the relationship between the company and service provider finite or continuous, exclusive or not, sporadic or ongoing?
  • Nature and degree of control over the work
    -  Who controls when and how the work is done and the economic aspects of the relationship?
    -  To what extent does the company supervise, train, or discipline the service provider?
  • Extent to which the work performed is an integral part of the business
    -  Is the service provider doing work that is central to the entity’s core business? Or is it an ancillary service? For example, this could be the difference between an accounting firm hiring an individual accountant to work during the busy season and a manufacturing company hiring an outside CFO.
  • Use of the worker’s skill and initiative in the business relationship
    -  Does the service provider use specialized skills developed on their own that contribute to their business or is that individual dependent on training from the entity?

These factors should be analyzed in a “totality of the circumstances” view of the parties’ relationship. On balance, if the service provider depends on the company for economic opportunity, under the new rule, the relationship is more likely to be an employment relationship. And, likewise, if the service provider is more economically independent, that would suggest an independent contractor relationship.

In light of the shifting legal landscape and the significant risks of getting it wrong, the time is ripe for companies to consult with counsel to understand the implications of using and retaining independent contractors.

For more information about these or other employment law topics, please contact the authors, Brooke A. Schneider, Devora L. Lindeman, or your personal Greenwald Doherty attorney contact.