On January 10, 2024, the U.S. Department of Labor (“Department”) published a final rule, effective March 11, 2024, revising the Department’s guidance on whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The ultimate inquiry is whether the worker is economically dependent on the employer for work, or in business for themself. A worker is an independent contractor if the worker is, as a matter of economic reality, in business for themself. A worker is an employee if the worker is, as a matter of economic reality, economically dependent on the employer for work. A worker’s status is imperative to determining whether the worker is covered by the FLSA, because the FLSA protections do not apply to independent contractors.
In its 2024 Final Rule, the Department affirmed that a worker is not an independent contractor if they are, as matter of economic reality, economically dependent on an employer for work. Economic dependence does not focus on the amount of income the worker earns, or whether the worker has other sources of income. The Department discussed the following six factors, which courts refer to as the “economic reality test”, to analyze employee or independent contractor status under the FLSA: (1) opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the potential employer; (3) degree of permanence of the work relationship; (4) nature and degree of control; (5) extent to which the work performed is an integral part of the potential employer’s business; and (6) skill and initiative. The FLSA does not define the term “independent contractor,” but since the 1940s, the Department and courts have applied the “economic reality test” to determine whether a worker is an employee or an independent contractor under the FLSA.
Previous Ruling, January 2021
In January 2021, the Department published a rule titled “Independent Contractor Status Under the Fair Labor Standards Act.” The 2021 Rule was considered a departure from the longstanding economic reality test and identified five factors to determine a worker’s status as an employee or independent contractor. The 2021 Rule factors were identical to the six factors in the 2024 Final Rule but did not consider the factor of investments by the worker and the potential employer. The 2021 Rule also designated a worker’s opportunity for profit or loss and a worker’s nature and degree of control over the work as the “core factors.” The 2021 Rule stated that it was “highly unlikely” that the other three factors could outweigh the combined value of the two “core factors.”
The effective date of the 2021 Rule was March 8, 2021; However, on Mach 4, 2021, the Department delayed the effective date. Then, on May 6, 2021, the Department withdrew the 2021 Rule. After a lawsuit was filed challenging the Department’s delay and withdrawal of the 2021 Rule, a Federal district court in the Eastern District of Texas issued a decision vacating the delay and withdrawal. The court decided that the 2021 Rule became effective on the original effective date of March 8, 2021.
Nonetheless, on October 13, 2022, the Department published a Notice of Proposed Rulemaking (NPRM), proposing to rescind and replace the 2021 Rule. The Department believed that the 2021 Rule did not fully comply with the FLSA and case law applying the economic reality test. Specifically, the Department believed that the designation of two “core factors” in the 2021 Rule departed from decades of case law, so it was unclear whether courts would adopt the analysis – which could take years to decide. The Department allowed interested parties to submit comments on the new proposal by November 28, 2022, which was extended by request until December 13, 2022. The Department received approximately 55,400 comments on the proposed rule. Generally, most employees, labor unions, worker advocacy groups, and other affiliated stakeholders expressed support for the NPRM, while most commenters who identified as independent contractors or business entities expressed opposition to the NPRM, criticizing the Department’s proposed economic reality test as ambiguous and biased against independent contracting. After considering the submitted comments and revising the 2021 Rule, the Department has returned to a totality-of-the-circumstances analysis, in which each of the economic reality factors is given full consideration to whether a worker should be classified as an employee or independent contractor.
Economic Reality Test
In its 2024 Final Rule, the Department does not identify “core factors,” as it did in the 2021 Rule, and instead returns to a totality-of-the-circumstances analysis, as established by United States v. Silk, 331 U.S. 704 (1947), addressing the distinction between employees and independent contractors under the Social Security Act (“SSA”). Silk identified the six factors of the economic reality test, which courts have noted are not exhaustive, and not one factor is controlling. Notably, the 2024 Final Rule also provides broader discussion of how scheduling, remote supervision, price setting, and the ability to work for others should be considered under the control factor.
An independent contractor, as used in the 2024 Final Rule, refers to a worker who, as a matter of economic reality, is not economically dependent on an employer for work and is in business for themselves. Although the FLSA does not define the term “independent contractor,” it contains definitions of “employer,” “employee,” and “employ.” “Employer” is defined as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” “Employee” is defined as “any individual employed by an employer.” “Employ” is defined as “to suffer or permit to work.” The ultimate inquiry is whether, as a matter of economic reality, the worker is economically dependent on the employer for work (employee) or is in business for themself (independent contractor). The major provisions of the Department’s 2024 Final Rule discussing the Economic Reality Test are summarized as follows.
I. Opportunity for profit or loss depending on managerial skill (§ 795.110(b)(1))
If a worker has no opportunity for a profit or loss, then the worker is likely an employee. Conversely, whether the worker exercises managerial skill is indicative of independent contractor status. The Department identified a nonexclusive list of facts that may be relevant when considering this factor. These include: whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space. The Department clarified that a decision to work more hours (when paid hourly) or work more jobs (when paid a flat fee per job) generally does not reflect independent contractor status under this factor. These decisions are considered routine employee decisions. The Department also noted that although fines, penalties, and chargebacks can indicate a worker’s economic dependence on the employer, whether they indicate dependence may depend on the circumstances.
II. Investments by the worker and the potential employer (§ 795.110(b)(2))
Capital or entrepreneurial investments are indicative of independent contractor status. Investments that are capital or entrepreneurial in nature are those that “generally support an independent business and serve a business-like function, such as increasing the worker’s ability to complete different types of work, reducing costs, or extending market reach.” For example, the Department explained, “the use of a personal vehicle that the worker already owns to perform work—or that the worker leases as required by the employer to perform work—is generally not an investment that is capital or entrepreneurial in nature.” Further, the Department explained that costs unilaterally imposed by an employer on a worker are not capital or entrepreneurial in nature. If a worker has no say in the cost or the amount, the cost cannot be an investment indicating that the worker is in business for themselves, and therefore an independent contractor.
Capital or entrepreneurial investments tend to increase the worker’s ability to do more work, reduce costs, or extend market reach. Investment in tools or equipment to perform a specific job would not qualify as capital or entrepreneurial. The Department explained, “an investment that is expedient to perform a particular job (such as tools or equipment purchased to perform the job and that have no broader use for the worker) does not indicate independence.” On the other hand, a worker may invest in tools and equipment for reasons beyond performing a particular job, such as to increase the worker’s ability to do different types of work, reduce costs, or extend market reach. Such investments can be capital or entrepreneurial in nature, and therefore indicative of independent contractor status.
III. Degree of permanence of the work relationship (§ 795.110(b)(3))
A worker with an indefinite or continuous duration of employment with an employer is likely an employee. A worker with a definite, non-exclusive, project-based or sporadic based duration of employment is likely an independent contractor. However, lack of permanence alone is not an indicator of independent contractor status. An independent contractor may have “regularly occurring fixed periods of work,” but “seasonal or temporary” work does not necessarily indicate independent contractor status. Further, a long-lasting relationship with clients does not convert an independent contractor to an employee. Moreover, even if the degree of permanence in a work relationship indicates employee status, the other factors of the Economic Reality Test are considered.
IV. Nature and degree of control (§ 795.110(b)(4))
Control was the most discussed factor in the Department’s 2024 Final Rule. In its 2021 Rule, the Department designated control as a “core factor” of the Economic Reality Test. However, in its 2024 Final Rule, the Department decided that the control factor should be analyzed with the same weight as every other factor. The Department clarified that the factor of control looks to the employer’s control over the worker, not the worker’s control over the work. The factor of control looks to whether the employer controls meaningful economic aspects of the work relationship, which is indicative to whether the worker is in business for themselves, and therefore an independent contractor. Common aspects of control include scheduling, supervision, price setting, and ability to work for others. When an employer decides these aspects for a worker, the worker is likely an employee. However, legally required control is disregarded in this analysis, since that control is imposed by the government, not the employer.
The Department noted that a worker’s ability to set their own schedule, by itself, provides minimal evidence of independent contractor status. The Department also acknowledged that employers may still be able to limit the number of hours available for a worker to choose or arrange the sequence or pace of the work in such a way that it would not be possible for the worker to have a truly flexible schedule, thus exhibiting control that could indicate that a worker is an employee.
Supervision is shown through direct or electronic supervision, along with the right to supervise or discipline workers. Traditional forms of in-person, continuous supervision are not required to determine that this factor weighs in favor of employee status. For example, employers can supervise their employees remotely through various electronic systems to verify attendance, task management, and performance assessment. Lack of supervision alone is not indicative of independent contractor status.
The employer’s ability to set prices or rates of service – paid to the workers or set by the employer – determines whether the worker is economically dependent on the employer for work, and therefore an employee. When a worker negotiates or set prices, the worker is likely an independent contractor. When an entity other than the worker sets a price or rate for the goods or services offered by the worker, or where the worker simply accepts a predetermined price or rate without meaningfully being able to negotiate it, the worker is likely an employee.
Ability to work for others
When an employer exercises control over a worker’s ability to work for others, this is indicative of employee status. This control can be exercised through, for example, a contractual provision. It could also be exercised indirectly by, for example, making demands on workers’ time or other restrictions. The Department noted that the mere fact that a worker earns income from more than one employer does not mean that the worker is not economically dependent on those employers. This reiterates that economic dependence is based on an analysis of the multifactor economic reality test, not whether a worker is less financially dependent on the income they earn from any one employer. For example, an employee may have two jobs, several part-time jobs, or a regularly recurring seasonal job in addition to a full-time employment situation, and an independent contractor may also have multiple customers based on their exercise of business initiative. Thus, the mere ability to work for others is not necessarily an indicator of employee or independent contractor status.
Legally required control exception
Legally required control such as compliance with legal obligations, health and safety standards, insurance requirements, meeting contractually agreed-upon deadlines or quality control standards are not relevant to the employee versus independent contractor inquiry. However, should an employer exert control which goes beyond compliance with applicable government regulation to serve the employer’s own compliance methods, safety, quality control, or contractual or customer service standards, may be relevant to if it is probative of a worker’s economic dependence. For example, a home care agency’s extensive provider qualifications, such as fulfilling comprehensive training requirements (beyond training required for relevant licenses), may be probative of control and employee status.
V. Extent to which the work performed is an integral part of the potential employer’s business
If an employer could not function without the service performed by a worker, then the service the worker provides is integral, and that worker is likely an employee. This factor looks to whether the work is important, critical, primary, or necessary to the employer’s business. Indicators that a worker is integrated into an employer’s main production processes, such as whether the worker is required to work at the employer’s main workplace or wear the employer’s uniform, may also illustrate an employer’s control over the work being performed. In most cases, if a potential employer’s primary business is to make a product or provide a service, then the workers who are involved in making the product or providing the service are performing work that is integral to the potential employer’s business. For example, a coffee shop’s “principal” business is making, selling, and serving coffee. A coffee shop might need window washers to ensure clear views and a clean appearance for customers, but the window washers are not generally integral to the principal business of the coffee shop.
VI. Skill and initiative
When a worker must use specialized skills in performing the work, that worker is likely an independent contractor. If a worker lacks specialized skills or where the worker is dependent on training from the employer to perform the work, that worker is likely an employee. The analysis hinges on whether the worker is dependent on training from the employer to perform the work. Further, having the skill and initiative, but not using those skills in a manner that evidences business-like initiative, indicates employee status. For example, a highly skilled welder provides specialty welding service, such as custom aluminum welding. The welder is not only technically skilled, but also uses and markets those skills in a manner that evidences business-like initiative, suggesting independent contractor status.
Reporting Newly Hired Employees (Public Act 103-0343)
Public Act 103-0343, which went into effect January 1, 2024, amended the Illinois Unemployment Insurance Act (820 ILCS 405/1801.1), and requires employers to report independent contractors and newly hired employees to the Directory of New Hires. The amended provision specifically states that the term “newly hired employee” applies to individuals who are employees within the meaning of Chapter 24 of the Internal Revenue Code of 1986, and to individuals under independent contractor arrangements. Effectively, Public Act 103-0343 groups independent contractors alongside the general common law definition of employees as covered under Public Act 103-0343’s definition of employee. Thus, starting January 1, 2024, employers now have a duty under this section to report all newly hired employees and independent contractors to the Illinois Directory of New Hires.
Employees and independent contractors, pursuant to the amendment text, are only considered to be “newly hired” if they either (1) have not been previously employed by the employer or (2) were previously employed by the employer but have been separated from that prior employment for at least 60 consecutive days. Employers must file a report with the Directory of New Hires within 20 days after the date of hire or, if they are sending the information electronically, by two monthly transmissions that are between 12-16 days apart from each other.
A worker’s status is imperative to determining whether the worker is covered by the FLSA, because the FLSA protections do not apply to independent contractors. Further, since the recent enactment of Public Act 103-0343, employers are now required to report any newly hired employees and independent contractors to the Directory of New Hires, making the determination of a worker’s status even more important. To determine whether a worker is an employee or an independent contractor, and therefore entitled to FLSA coverage, courts apply the Economic Reality Test. This test looks for (1) opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the potential employer; (3) degree of permanence of the work relationship; (4) nature and degree of control; (5) extent to which the work performed is an integral part of the potential employer’s business; and (6) skill and initiative.
In sum, a worker with opportunity for profit or loss depending on managerial skill is likely an independent contractor. A worker who makes capital or entrepreneurial investments is indicative of independent contractor status. A worker who has a definite, non-exclusive, project-based or sporadic based duration of employment is likely an independent contractor. A worker who is not subject to the various forms of control by an employer is likely an independent contractor. A worker whose role is not integral to the employer’s business is likely an independent contractor. Finally, a worker who must use specialized skills in performing the work is likely an independent contractor.
not pictured: Michael Parille