News

Department of Labor Issues Final Rule on Independent Contractor Classification

The U.S. Department of Labor (DOL) has announced a final rule to help employers and workers better understand when a worker qualifies as an employee and when they would be considered an independent contractor under the Fair Labor Standards Act (FLSA).

This rule rescinds the Independent Contractor Status Under the Fair Labor Standards Act rule (2021 IC Rule), which was 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.

According to the DOL, the final rule is intended to provide greater guidance on proper classification of workers and avoid misclassifying employees as independent contractors. The new rule—which takes effect March 11—replaces one established by the previous administration, which had a much broader definition of what constituted contract labor. Some industry groups have interpreted the new rule as forcing companies to reclassify potentially millions of workers, creating difficulties for many employers and employees alike. This rule is widely expected to increase labor costs for industries that rely on contract labor or freelancers, such as cleaning service providers, transportation, manufacturing, healthcare, and app-based gig services.

“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” said Julie Su, Acting Secretary of Labor. “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.”

Confusion over which workers actually qualify as employees was in part addressed back in June 2023, when the U.S. Nation Labor Relations Board ruled that some workers, formally treated as independent contractors, might need to instead be handled as employees. (See New Ruling Could Allow Gig Workers to Unionize.) At the time, the DOL was still working on finalization of its rule to determine more definitively a worker’s employee status.

The new rule restores a long-used multifactor analysis, which addresses six factors of a worker’s relationship with an employer:

• Any opportunity for profit or loss a worker might have
• The financial stake and nature of any resources a worker has invested in the work
• The degree of permanence of the work relationship
• The degree of control an employer has over the person’s work
• Whether the work the person does is essential to the employer’s business
• The worker’s skill and initiative.

In crafting the new rule, the department’s Wage and Hour Division considered feedback provided by stakeholders at forums in the summer of 2022 and during the comment period after the proposal’s announcement in October 2022. The final rule takes effect on March 11, 2024.

Links to additional information are available below:

• Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act – Federal register notice
• Frequently Asked Questions – General and substantive questions about the final rule
• Small Entity Compliance Guide – A guide to assist small businesses to comply with the final rule, including an overview of the rule, the six factors of the economic reality test, common questions, and additional resources
• Proposed Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act – Notice of proposed rulemaking that was issued in advance of the final rule
• U.S. Department of Labor Finalizes Independent Contractor Regulation – Analysis of the final rule by Littler.