The new rule rescinds the prior rule issued in 2021, “Independent Contractor Status Under the Fair Labor Standards Act.” The DOL states that the new rule replaces the prior regulation with an analysis that is more consistent with judicial precedent and the FLSA’s text and purposes.

The new rule will become effective on March 11, 2024.

The new final rule

Under the new final rule, which was published in the January 10, 2024 Federal Register, the DOL will return to the “totality of the circumstances” approach previously employed under the “economic reality test” in determining whether a worker should be considered an employee or independent contractor. The test will determine whether the worker is economically dependent on the employer for work (and is thus an employee) or is in business for themselves (and is therefore considered an independent contractor).

Six, largely familiar factors will be considered as part of this test, including:

• Opportunity for profit or loss depending on managerial skill
• Investments by the worker and the potential employer
• Degree of permanence of the work relationship
• Nature and degree of control
• Extent to which the work performed is an integral part of the potential employer’s business
• Skill and initiative

All six factors will be considered as part of the analysis, rather than a focus on certain “core factors” among the group, as had been the case under the 2021 rule.

If, after applying these factors, a worker is determined to be an employee, the relevant protections afforded under the FLSA, including minimum wage and overtime, would apply. If deemed an independent contractor, the FLSA would not apply.

Implications for employers of independent contractors

Lawsuits are anticipated challenging the new rule that may impact the March 11, 2024 effective date. Segal will continue to monitor these developments and provide updates.