What is the Employee or Independent Contractor Classification Under the Fair Labor Standards Act Final Rule?

This final rule, announced on January 9, 2024, revises the Department’s guidance on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA). Specifically, the final rule rescinds the 2021 Independent Contractor Rule that was published on January 7, 2021 and replaces it with guidance for how to analyze employee or independent contractor classification that is more consistent with the FLSA as interpreted by longstanding judicial precedent. The Department believes that this final rule will reduce the risk that employees are misclassified as independent contractors, while at the same time providing greater consistency for businesses that engage (or wish to engage) with individuals who are in business for themselves.

2. When is this rule effective?

This final rule is effective on March 11, 2024.

3. Why is the Department replacing the guidance it issued in the 2021 Independent Contractor Rule?

The Department believes that the 2021 Independent Contractor Rule does not fully comport with the text and purpose of the FLSA as interpreted by courts. Specifically, the 2021 Independent Contractor Rule includes provisions that are in tension with longstanding case law and the Department’s prior guidance on independent contractor status, such as:

         its designation of two “core factors”—control and opportunity for profit or loss—which are given a greater predetermined weight in the analysis;

         its consideration of a worker’s investments and initiative only as part of the opportunity for profit or loss factor; and

         its prohibition against considering whether the work performed is central or important to the potential employer’s business.

These and other provisions in the 2021 Independent Contractor Rule narrowed the economic reality test by limiting the facts that may be considered as part of the test—facts that the Department believes are relevant in determining whether a worker is economically dependent on the employer for work (i.e., an employee under the FLSA) or is in business for themself (i.e., an independent contractor). The Department further believes that leaving the 2021 Independent Contractor Rule in place would have a confusing and disruptive effect on workers and businesses alike due to its departure from decades of case law describing and applying the multifactor economic reality test as a totality-of-the-circumstances test.