CLIENT ALERT – Status Matters: Independent Contractor or Employee?

The Department of Labor (the “DOL”) recently issued a new rule establishing a six-factor test to determine if a worker is properly classified as an employee or an independent contractor under the Fair Labor Standards Act (the “FLSA”). If properly classified as an independent contractor, the worker is not entitled to various employment-related protections (e.g., overtime, workers’ compensation, etc.) However, misclassification can create significant unanticipated burdens on an employer including (but not limited to) private litigation and DOL enforcement actions. Thus, awareness of this new six-factor test is crucial for employers.

The new rule, issued on January 10, 2024 (the “2024 IC Rule”), identifies the following six factors to be considered (based on the DOL’s prior “economic reality” approach). Importantly, no factor should be given predetermined weight over the other factors:

  1. Opportunity for Profit or Loss Depending on Managerial Skill. Consider whether the
    worker has opportunities for profit or loss based on “whether the worker exercises managerial
    skill that affects the worker’s economic success or failure in performing the work.”
  2. Investments by the Worker and the Potential Employer. Consider whether investments by
    a worker are capital or entrepreneurial in nature such that the investments “generally support an
    independent business and serve a business-like function, such as increasing the worker’s ability to
    do different types of or more work, reducing costs, or extending market reach.”
  3. Degree of Permanence of the Work Relationship. Consider the duration of the relationship
    as work that is indefinite in duration, continuous, or exclusive of work for other employers weighs
    in favor of the worker being an employee. On the other hand, work that is definite in duration,
    non-exclusive, project-based, or sporadic is indicative of independent contractor status.
  4. Nature and Degree of Control. Consider the purported employer’s control over the
    performance of the work and the economic aspects of the working relationship. Facts relevant to
    the putative employer’s control over the worker include, but are not limited to, scheduling,
    supervision, price setting, and ability to work for others.
  5. Extent to Which the Work Performed is an Integral Part of the Potential Employer’s
    Business    . Consider whether the work performed is critical, necessary, or central to the employer’s
    principal business. If the purported employer could not function without the services provided by
    the worker, the service is integral and supports classification as an employee.
  6. Skill and Initiative. Consider whether the worker uses specialized skills to perform the work
    and whether those skills contribute to a business-like initiative. Where the worker does not use
    specialized skills or the worker depends on training from the employer, the worker is likely an
    employee. Whereas, pre-existing specialized skills are indicative of independent contractor
    status.

The 2024 IC Rule, effective March 11, 2024, seeks to reduce inadvertent misclassification of
employees as independent contractors and potentially avoid costly litigation.

For assistance with employment law matters, including the Fair Labor Standards Act, please
contact our employment attorneys listed below.

Jody Maier, Esq. – jmaier@levingann.com – (410) 321-4665
Aaron J. Turner, Esq. – aturner@levingann.com – (410) 321-4667