New independent contractor rule throws spotlight on minimum wage, overtime pay

The Department of Labor (DOL) finalized a rule making independent contractor classifications tougher and throwing the spotlight on minimum wage and overtime pay.

The final rule is scheduled to take effect March 11, 2024.

At that time, employers will need to follow a six-factor test to determine a worker’s status as an independent contractor or employee under the Fair Labor Standards Act (FLSA).

Of course, if you determine someone is an independent contractor, you won’t need to pay that person minimum wage and overtime under the FLSA.

Failing to make the right call, though, can mean you’ll owe back pay and penalties.

“This rule will help to ensure that workers who are employees are paid the minimum wage and overtime due them,” said Jessica Looman, the administrator of the DOL’s Wage and Hour Division.

Who’s an independent contractor?

As the final rule puts it, independent contractors are workers who aren’t economically dependent on employers for work and are in business for themselves.

The key question is: What factors should an employer use to determine that a worker isn’t economically dependent and is therefore an independent contractor?

In 2021, the DOL put a five-factor test in place, with an emphasis on two core factors.

You can say goodbye to that standard.

The DOL is returning to a totality-of-the-circumstances analysis of the economic reality test.

Plus, the DOL has added a factor back in, making it a six-factor test once again.

Here are the six factors, contained in the final rule issued January 10, 2024:

1. Opportunity for profit or loss depending on managerial skill.
2. Investments by the worker and the potential employer.
3. Degree of permanence of the work relationship.
4. Nature and degree of control.
5. Extent to which the work performed is an integral part of the potential employer’s business.
6. Worker’s skill and initiative.

A closer look

It’s worth noting that after the DOL released the proposed rule in the fall of 2022, it received about 55,400 comments. A sliver of those comments led the DOL to make changes before issuing the final rule.

Here’s a closer look at the coming requirements, as written in the 106-page rule:

Factor #1: To decide whether a worker has the opportunity for profit or loss depending on managerial skill, the DOL has provided a non-exclusive list. Employers can consider whether the worker:

• determines or can meaningfully negotiate the charge or pay for the work provided
• accepts or declines jobs or chooses the order and/or time in which the jobs are performed
• engages in marketing, advertising or other efforts to expand their business or secure more work, and
• makes decisions to hire others, purchase materials and equipment, and/or rent space.

This factor was one of the core factors in the 2021 independent contractor rule. Under the new 2024 rule, it’s equal among all the others.

Factor #2: When looking at how the investments of the worker compare to the potential employer’s investments, it’s not only dollar value or size that counts. Rather, employers should examine whether the worker is making similar types of investments, even if they’re made on a smaller scale.

Note: DOL decided that investments by the worker and the potential employer is something distinct from the above factor (hence the return to six factors).

Factor #3: If the work relationship is indefinite in duration or continuous, that weighs in favor of the worker being an employee. On the other hand, you’re more likely to have an independent contractor situation when the work relationship is definite in duration, non-exclusive, project-based or sporadic.

Factor #4: When assessing nature and degree of control, employers can continue to look at scheduling, supervision over the performance of work and the worker’s ability to work for others. But now this factor will carry as much weight as any other factor.

Other relevant details include whether the potential employer:

• uses technological means to supervise the performance of the work (such as by means of a device or electronically)
• reserves the right to supervise or discipline workers, or
• places demands or restrictions on workers that don’t allow them to work for others or work when they choose.

One point of clarification the DOL made from the proposed rule has to do with compliance efforts. Ensuring compliance with a law or reg – whether on the federal level or another level – may be unavoidable if it’s a legal obligation. However, be careful not to cross the line into insisting on your own compliance methods or standards (quality, safety, customer service, etc.). Otherwise, you may end up with an employer-employee relationship.

The DOL cleared up the section of its proposed rule that dealt with costs imposed by potential employers. Commenters expressed to the DOL that these costs could appear to be capital or entrepreneurial in nature. However, costs that are unilaterally imposed aren’t indicative of a worker’s capital or entrepreneurial investment. So, there’s no push toward independent contractor status with this.

Factor #5: To better understand the economic reality of the relationship, employers should examine the extent to which the work performed is an integral part of their business.

The scales tip in favor of an employee when the work performed is critical, necessary or central to the potential employer’s principal business. If the opposite is true – that the work isn’t critical, necessary or central to the potential employer’s principal business – the scales will tip toward the independent contractor status.

Factor #6: Bringing a specialized skill to a job doesn’t necessarily indicate whether someone is an independent contractor or an employee. The issue is whether that skill is used in connection with a business-like initiative. If so, this factor would lean in favor of an independent contractor classification.

In the case where the worker doesn’t use a specialized skill or the worker is dependent on training from the potential employer to perform the work, that indicates an employee relationship.

In addition to the above six factors, DOL notes in its final rule that other factors may be relevant in making a determination about someone’s employment status.