FLSA Updates the Employee vs. Independent Contractor Classification

If you’re a business owner hiring freelancers or a freelancer taking on projects, then you need to be able to navigate the murky waters of employee and independent contractor classifications. Understanding the Fair Labor Standards Act (FLSA) guidelines will help you steer clear of legal issues.

The rules are changing. On March 11, 2024, new guidelines go into effect from the U.S. Department of Labor on how to determine if someone is an independent contractor or an employee. This final rule under the Fair Labor Standards Act rescinds the Independent Contractors Status Under the Fair Labor Standards Act Rule (2021 IC Rule) published on January 7, 2021, and replaces it with an analysis for determining employee or independent contractor status that is more consistent with the FLSA as interpreted by longstanding judicial precedent.

The Economic Reality Test

There is no single rule for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. Rather, an “economic reality test” looks to the facts of a situation, rather than assuming that a written label, contractual arrangement, or form of business decides if a worker is economically dependent on an employer. To analyze if a worker is an employee or independent contractor, the final rule provides six factors that businesses and workers should consider when analyzing the economic realities of the working relationship. These factors, described in the economic reality test of the final rule, are:

The heart of the classification lies in the “economic reality test.” This test doesn’t rely on your job title or contract alone; it looks at the actual working relationship. Let's break down the six key factors:

1. Opportunity for Profit or Loss: This factor examines whether you, as a worker, can influence your earnings through your managerial skills and decision-making.
2. Investment in Facilities and Equipment: Are you investing in tools and equipment for your work? This factor weighs the nature and extent of your investment against that of the employer.
3. Permanence of the Relationship: A more permanent and exclusive work relationship might suggest employee status, whereas a temporary or project-based one leans towards independent contractor status.
4. Control Over Work: This crucial factor looks at how much control the employer has over your work process and schedule.
5. Integral Part of Business: If your work is a core element of the business, this might indicate an employee relationship.
6. Skill and Initiative: This factor assesses whether your skills and initiative reflect an independent business role or an employment role.

Real-World Implications

Misclassifying workers can have significant legal and financial implications. For employers, it’s about understanding these nuances to avoid penalties, and for workers, it’s about knowing your rights. Whether you’re a startup founder, a gig worker, or a freelancer, staying informed is key to navigating these complex waters. If you’re unsure about your classification, consider consulting a legal expert for personalized advice.