In January 2024, the U.S. Department of Labor (DOL) issued a long-awaited final rule that modifies the determination of whether a worker is classified as an employee or an independent contractor under the Fair Labor Standards Act (FLSA).  

The final rule addresses how to determine whether a worker is properly classified as an employee or independent contractor. The term “independent contractor" refers to “workers who, as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves.” The final rule, which adopts the proposed rule with a few modifications, will be effective on March 11, 2024. In addition, the final rule also rescinds the 2021 Independent Contractor Rule, which the DOL characterized as being inconsistent with the law and longstanding judicial precedent. 

Understanding the “Totality of Circumstances” 

The final rule adopts a totality-of-the-circumstances analysis of the economic reality test rather than using “core factors.” The final rule lists six factors to guide the assessment of the economic realities of the working relationship and to help answer the question of economic dependence under the FLSA: 

1. The 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. Skill and initiative 

The final rule states these factors are not exhaustive and that no single factor is determinative. To help guide employers, the DOL created a Final Rule FAQ page, which answers some of the questions surrounding the new rule.   

By partnering with a payroll company familiar with FLSA regulations and others impacting your business’s payroll operations, you can gain confidence you are taking the right steps to stay compliant and avoid fines.