Implications of the Final Regulations Defining “Employee” Under the FLSA

January 18, 2024

Worker-status determinations under the Fair Labor Standards Act (“FLSA”) will be highly subjective and, in some cases, unpredictable under final regulations (the “2024 Regulations”) the U.S. Department of Labor (“DOL”) published on January 10, 2024, which define the term “employee” for purposes of the FLSA. They will become effective on March 11, 2024.

The 2024 Regulations adopt a new iteration of the “economic realities” test,[1] superseding a different iteration of the test contained in regulations defining the same term, which DOL issued during 2021 under the Trump Administration. The 2024 Regulations rescind the 2021 regulations.

The new iteration of the test certainly could impact any company that does business with independent contractors. But, for two reasons, the extent of this impact is not clear at this time.

First, the 2024 Regulations already are the subject of multiple legal challenges to their legal validity. If the regulations were held invalid, then they would have no impact. Second, the U.S. Supreme Court is hearing oral argument this week in two pending cases that present the question of how much deference do courts owe administrative guidance, such as the 2024 Regulations. If the Supreme Court were to hold that administrative guidance is to be accorded only little or no deference by courts, then the 2024 Regulations would have only minimal if any impact on a court that determines an individual’s status for purposes of the FLSA. But the regulations could still guide the DOL’s analysis of a work relationship in the context of a DOL investigation.

Notwithstanding the uncertainty surrounding the 2024 Regulations, it would be prudent for companies to evaluate their current independent-contractor relationships under DOL’s new iteration of the “economic realities” test.

Throughout the preamble (the “Preamble”) accompanying the 2024 Regulations, DOL emphasized that the ultimate inquiry under the six-factor test DOL adopted is “whether, as a matter of economic reality, the worker is economically dependent on the employer for work (and is thus an employee) or is in business for themselves (and is thus an independent contractor).”[2] Stated differently, “the term ‘independent contractor’ refers to workers who, as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves.”[3]

In assessing economic dependence, DOL noted that courts and DOL have historically conducted a totality-of-the-circumstances analysis, considering multiple factors that include – but are not limited to – the six factors discussed in the 2024 Regulations.

What this means is that when a company defends its independent-contractor relationships under the FLSA, its ultimate objective is to demonstrate that the individuals at issue are, as a matter of economic reality, in business for themselves and are not dependent on the company for work. To prove this, the company is not restricted to only the six factors contained in the test DOL adopted. DOL made clear that a company can also rely on other factors that help demonstrate that the individuals are in business for themselves.

In this regard, DOL explained that the type of economic dependence the test considers is whether an individual is “economically dependent on an employer for work—not for income.”[4] This “considers whether the worker is dependent on the employer for work or depends on the worker’s own business for work.”[5] DOL explained that ‘‘it is not dependence in the sense that one could not survive without the income from the job that we examine, but dependence for continued employment.’’[6] The issue is whether an individual is dependent on a company for obtaining the type of work that the individual performs pursuant to the individual’s contractual relationship with the company.[7]

Another important point DOL made in the Preamble is that “economic dependence should never be presumed and that when it does not exist, that worker is not an employee.”[8] Thus, unlike the unemployment statutes of certain states, DOL confirmed that there is no presumption of employment under the FLSA.

Finally, DOL advised that it “will provide additional guidance after this final rule takes effect.”[9]

The Six Factors

The six-factor economic realities test the final regulations adopt for determining an individual’s status for purposes of the FLSA considers the following factors:

Opportunity for profit or loss depending on managerial skill.
Investments by the worker and the potential employer.
Degree of permanence of the work relationship.
Nature and degree of control.
Extent to which the work performed is an integral part of the potential employer’s business.
Skill and initiative.

As noted, these factors are not exclusive. The final regulations indicate that additional factors can be considered if they are relevant to the overall question of economic dependence

Before discussing the DOL’s explanation of its six-factor economic realities test, it is important to note DOL’s emphasis that when undertaking an analysis applying the test, “each factor is examined and analyzed in relation to one another and to the [FLSA’s] definitions. Importantly, ‘[n]one of these factors is determinative on its own, and each must be considered with an eye toward the ultimate question— the worker’s economic dependence on or independence from the alleged employer.’”[10] DOL also explained that:

Depending on the facts and circumstances of a case, it is to be expected that one or more factors may be more probative than the other factors. The analysis, however, cannot be conducted like a scorecard or a checklist…. Similarly, it is possible that not every factor will be particularly relevant in each case and that is also to be expected.[11]

An aspect of the new iteration of the test that makes the analysis especially subjective and vulnerable to unpredictability is the absence of any guidance as to which facts or factors are less relevant – or should be given additional weight – when applied to a specific work relationship.

The following sets forth the DOL’s description of the factors, examples of the factors DOL provided, and commentary by DOL in the Preamble that provides additional guidance on how DOL intends to apply the factors.

Opportunity for profit or loss depending on managerial skill

This factor considers whether the worker has opportunities for profit or loss based on managerial skill (including initiative or business acumen or judgment) that affect the worker’s economic success or failure in performing the work. The following facts, among others, can be relevant:

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.

If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee. Some decisions by a worker that can affect the amount of pay that a worker receives, such as the decision to work more hours or take more jobs when paid a fixed rate per hour or per job, generally do not reflect the exercise of managerial skill indicating independent contractor status under this factor.

Preamble Example: Opportunity for Profit or Loss Depending on Managerial Skill

A worker for a landscaping company performs assignments only as determined by the company for its corporate clients. The worker does not independently choose assignments, solicit additional work from other clients, advertise the landscaping services, or endeavor to reduce costs. The worker regularly agrees to work additional hours in order to earn more. In this scenario, the worker does not exercise managerial skill that affects their profit or loss. Rather, their earnings may fluctuate based on the work available and their willingness to work more. Because of this lack of managerial skill affecting opportunity for profit or loss, these facts indicate employee status under the opportunity for profit or loss factor.

In contrast, a worker provides landscaping services directly to corporate clients. The worker produces their own advertising, negotiates contracts, decides which jobs to perform and when to perform them, and decides when and whether to hire helpers to assist with the work. This worker exercises managerial skill that affects their opportunity for profit or loss. Thus, these facts indicate independent contractor status under the opportunity for profit or loss factor.

Preamble Guidance on How DOL Will Apply the Factor

DOL made clear that the list of facts relevant to this factor is not intended to be exclusive, that other factors not listed can also be taken into account,[12] and that “neither any fact listed nor this factor will be dispositive of a worker’s status.”[13]
“Managerial skill includes ‘initiative or business acumen or judgment.’’’[14]
DOL also noted that “nothing in this final rule forecloses consideration, in an appropriate case, of investments as they relate to the worker’s opportunity for profit or loss.”[15]
DOL clarified 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.[16]
Importantly, the Preamble states that “[c]onsistent with a totality-of-the-circumstances analysis, not hiring others and not advertising, for example, do not make the worker an employee or even conclusively determine that this factor indicates employee status…. In that same vein, soliciting work from multiple clients, for example and while of course relevant, does not guarantee that a worker is an independent contractor or even that this factor points to independent contractor status.”[17]
DOL believes that “the opportunity, for example, to hire others or purchase materials and equipment, and a decision to not take such action based on a consideration of possible costs and rewards, can indicate managerial skill. For this to be the case, the worker must have a real opportunity to take the action and make an independent business decision indicating managerial skill to not take the action. In other circumstances, not taking an action may not indicate managerial skill. For example, if the action requires approval from the employer (for example, the employer must approve any person hired by the worker as a helper) or the action is not feasible financially (for example, the worker is lower-paid and cannot hire others or make purchases), then there is likely no opportunity for the worker to make an independent business decision indicating managerial skill. Regardless, no one action or lack of action should determine whether this factor indicates employee or independent contractor status.”[18]
In DOL’s view, “accepting or declining jobs is an underlying fact that is relevant to determining whether the worker exercises managerial skill.”[19] DOL recognizes that “a worker’s ability to freely choose among jobs based on the worker’s assessment of the comparable profitability of those jobs can indicate independent contractor status when applying the opportunity for profit or loss factor.”[20]
DOL explained that a worker can be “working more to earn more but not exercising managerial skill (at least in that regard). On the other hand, a worker may be able to accept and decline jobs where the jobs have varying degrees of potential profitability and the worker must determine which jobs to pursue and how much of the worker’s time and resources should be devoted to the various jobs. That worker is exercising managerial skill (at least in that regard), which weighs in favor of independent contractor status.”[21]
As to an individual’s risk of loss, DOL explained that “[a]lthough a worker need not experience a loss or even likely experience a loss for this factor to indicate independent contractor status … —‘‘no risk of loss whatsoever’’— does not suggest that the worker is an independent contractor because at least some risk of a loss is inherent in operating an independent business.”[22]
- DOL notes, however, that “whether such a worker … is an employee or independent contractor depends on application of all of the factors and a consideration of the totality of the circumstances because neither this factor nor any other factor is necessarily dispositive. Thus, workers ‘‘who operate thriving businesses with their laptop computers and incur no risk of loss whatsoever’’ … may be employees or independent contractors depending on all of the factors.”[23]
Investments by the worker and the potential employer

This factor considers whether any investments by a worker are capital or entrepreneurial in nature. Costs to a worker of tools and equipment to perform a specific job, costs of workers’ labor, and costs that the potential employer imposes unilaterally on the worker, for example, are not evidence of capital or entrepreneurial investment and indicate employee status.

Investments that are capital or entrepreneurial in nature and thus indicate independent contractor status 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.

Additionally, the worker’s investments should be considered on a relative basis with the potential employer’s investments in its overall business. The worker’s investments need not be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of investments or the sizes of the worker and the potential employer. Instead, the focus should be on comparing the investments to determine whether the worker is making similar types of investments as the potential employer (even if on a smaller scale) to suggest that the worker is operating independently, which would indicate independent contractor status.

Preamble Example: Investments by the Worker and the Potential Employer

A graphic designer provides design services for a commercial design firm. The firm provides software, a computer, office space, and all the equipment and supplies for the worker. The company invests in marketing and finding clients and maintains a central office from which to manage services. The worker occasionally uses their own preferred drafting tools for certain jobs. In this scenario, the worker’s relatively minor investment in supplies is not capital in nature and does little to further a business beyond completing specific jobs. Thus, these facts indicate employee status under the investment factor.

A graphic designer occasionally completes specialty design projects for the same commercial design firm. The graphic designer purchases their own design software, computer, drafting tools, and rents an office in a shared workspace. The graphic designer also spends money to market their services. These types of investments support an independent business and are capital in nature (e.g., they allow the worker to do more work and extend their market reach). Thus, these facts indicate independent contractor status under the investment factor.

Preamble Guidance on How DOL Will Apply the Factor

DOL explained that “the focus should be on whether the investment is capital or entrepreneurial in nature and that capital or entrepreneurial investments tend to increase the worker’s ability to do different types of or 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.”[24]
- In this regard, DOL acknowledged that “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 or more work, reduce costs, or extend market reach. Such investments can be capital or entrepreneurial in nature.”[25] DOL believes that “a worker’s purchase of tools and equipment for use performing multiple jobs for multiple employers can be a capital or entrepreneurial investment.”[26]
- And, “[a] worker may have expenses to perform a specific job and also make investments that generally support, expand, or extend the work performed which may be of a capital or entrepreneurial nature. Thus, the existence of expenses to perform a specific job will not prevent this factor from indicating independent contractor status so long as there are also investments that are capital or entrepreneurial in nature.”[27]
DOL noted that “costs unilaterally imposed by an employer on a worker are not capital or entrepreneurial in nature. Where the worker has no meaningful say either in the fact that the cost will be imposed or the amount, the cost cannot be an investment indicating that the worker is in business for themself. Using malpractice insurance for nurses as an example, if such insurance is required by law or regulation and a nursing staffing agency purchases and maintains the insurance for the nurses and passes that cost on to, or imposes a charge for insurance on, the nurses, that cost does not indicate independent contractor status. But, if insurance is required by law or regulation, and the nurse can choose among policies based on their prices and coverages and does independently procure a policy, then the cost of the insurance could be capital or entrepreneurial in nature and indicative of independent contractor status.”[28]
DOL agrees that “focusing the comparison of the worker’s and the employer’s investments on their qualitative natures is helpful…. [D]ifferent industries may be more or less ‘‘capital-intensive.’’ Thus, focusing only on the quantitative measures (e.g., dollar values or size) of the investments may not achieve the full probative value of comparing the investments. On the other hand, comparing the investments in a qualitative manner (i.e., the types of investments) is a better indicator of whether the worker is economically dependent on the employer for work or is in business for themself. That is because regardless of the amount or size of their investments, if the worker is making similar types of investments as the employer or investments of the type that allow the worker to operate independently in the worker’s industry or field, then that fact suggests that the worker is in business for themself.”[29]
- For example, “an individual photographer who has cameras and related equipment, has software to edit photos, and works out of their home. Although the individual may not have the extent of equipment, software with every capability, or a leased office space like a larger firm, the type of investments that the individual has made are sufficient in this case for the individual to operate independently in the photography field—suggesting independent contractor status.”[30]
DOL makes clear that “there are no minimum-dollar thresholds or other requirements for investments to be capital or entrepreneurial and thus indicate independent contractor status. Instead, focusing on the nature of the worker’s investments ties this factor to the worker’s economic dependence or independence.”[31]
“As a general matter and as opposed to costs that a potential employer unilaterally imposes on a worker, a worker’s efforts to obtain specialized education, training, and certification that are required by an industry can be capital or entrepreneurial in nature if (for example and as explained in the regulatory text) they increase the worker’s ability to do different types of or more work or extend market reach.”[32]
Degree of permanence of the work relationship

This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers. This factor weighs in favor of the worker being an independent contractor when the work relationship is:

definite in duration,
nonexclusive,
project-based, or
sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities.

This may include regularly occurring fixed periods of work, although the seasonal or temporary nature of work by itself would not necessarily indicate independent contractor classification.

Where a lack of permanence is due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ, this factor is not necessarily indicative of independent contractor status unless the worker is exercising their own independent business initiative.

Preamble Example: Degree of Permanence of the Work Relationship

A cook has prepared meals for an entertainment venue continuously for several years. The cook prepares meals as directed by the venue, depending on the size and specifics of the event. The cook only prepares food for the entertainment venue, which has regularly scheduled events each week. The relationship between the cook and the venue is characterized by a high degree of permanence and exclusivity. These facts indicate employee status under the permanence factor.

A cook has prepared specialty meals intermittently for an entertainment venue over the past 3 years for certain events. The cook markets their meal preparation services to multiple venues and private individuals and turns down work for any reason, including because the cook is too busy with other meal preparation jobs. The cook has a sporadic or project-based nonexclusive relationship with the entertainment venue. These facts indicate independent contractor status under the permanence factor.

Preamble Guidance on How DOL Will Apply the Factor

Consistent with the totality-of-the-circumstance analysis, DOL explained that “[e]ven if the degree of permanence in a work relationship indicates employee status, this is just one factor that would be considered along with other factors such as control, opportunity for profit or loss, investment, integral, and skill and initiative.”[33]
- In this regard, DOL advised that it “does not believe there is a scenario in which, for example, a worker who controls conditions of employment, sets their own fees, hires helpers, and markets their business is converted from an independent contractor to an employee solely because they have long-lasting relationships with some clients.”[34]
DOL recognized that “an exclusive relationship alone would not be determinative of the economic reality of the working relationship, and that it is important to look at all relevant factors, including factors … such as the worker’s opportunity for profit or loss, to aid in the analysis. [DOL] notes that by recognizing that exclusivity weighs in favor of the worker being an employee, [DOL] is not stating either that independent contractors can never have exclusive relationships with other businesses or that employees who have nonexclusive relationships with employers because they work multiple jobs become independent contractors.”[35]
DOL clarified that “[s]ome commenters mistakenly believed that the regulatory text explicitly stated that contractual renewals equate to employee status and objected for largely the same reasons commenters objected to their reading of the proposed regulatory text to imply that businesses could not have long-term relationships with clients without being considered employees of their clients.”[36]
DOL expressed agreement “that the permanence factor, like other factors in the economic reality test, is best understood in the overall context of the relationship between the parties where all relevant aspects are considered. [DOL] also clearly recognizes and appreciates that people who are in business for themselves often rely on repeat business and long-term clients or customers in order for their business to remain economically viable or successful. Thus, [DOL] notes that the proposed regulatory text does not reduce the permanence analysis to a simple long-term/short term question. Instead, it looks to the general characteristics historically identified by courts and [DOL] regarding the permanency factor, which indicate employee status where there is a longer-term, continuous, or indefinite work relationship, and independent contractor status where the work is definite in duration, nonexclusive, project-based, or sporadic due to the worker being in business for themself. It explicitly recognizes that an independent contractor may have ‘regularly-occurring fixed periods of work.’’’[37]

Nature and degree of control

This factor considers the potential employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship. Facts relevant to the potential employer’s control over the worker include whether the potential employer:

sets the worker’s schedule,
supervises the performance of the work, or
explicitly limits the worker’s ability to work for others.

Additionally, facts relevant to the potential employer’s control over the worker include whether the potential employer:

uses technological means to supervise the performance of the work (such as by means of a device or electronically),
reserves the right to supervise or discipline workers, or
places demands or restrictions on workers that do not allow them to work for others or work when they choose.

Whether the potential employer controls economic aspects of the working relationship should also be considered, including control over prices or rates for services and the marketing of the services or products provided by the worker.

Actions taken by the potential employer for the sole purpose of complying with a specific, applicable Federal, State, Tribal, or local law or regulation are not indicative of control. Actions taken by the potential employer that go beyond compliance with a specific, applicable Federal, State, Tribal, or local law or regulation and instead serve the potential employer’s own compliance methods, safety, quality control, or contractual or customer service standards may be indicative of control.

More indicia of control by the potential employer favors employee status; more indicia of control by the worker favors independent contractor status.

Preamble Example: Nature and Degree of Control

A registered nurse provides nursing care for Alpha House, a nursing home. The nursing home sets the work schedule with input from staff regarding their preferences and determines where in the nursing home each nurse will work. Alpha House’s internal policies prohibit nurses from working for other nursing homes while employed with Alpha House in order to protect its residents. In addition, the nursing staff are supervised by regular check-ins with managers, but nurses generally perform their work without direct supervision. While nurses at Alpha House work without close supervision and can express preferences for their schedule, Alpha House maintains control over when and where a nurse can work and whether a nurse can work for another nursing home. These facts indicate employee status under the control factor.

Another registered nurse provides specialty movement therapy to residents at Beta House. The nurse maintains a website and was contacted by Beta House to assist its residents. The nurse provides the movement therapy for residents on a schedule agreed upon between the nurse and the resident, without direction or supervision from Beta House, and sets the price for services on the website. In addition, the nurse simultaneously provides therapy sessions to residents at Beta House as well as other nursing homes in the community. The facts—that the nurse markets their specialized services to obtain work for multiple clients, is not supervised by Beta House, sets their own prices, and has the flexibility to select a work schedule indicate independent contractor status under the control factor.

Preamble Guidance on How DOL Will Apply the Factor

DOL explained that “this factor should necessarily focus on whether the employer controls meaningful economic aspects of the work relationship because that focus is probative of whether the worker stands apart as their own business. Simply assessing whether the employer lacks control over discrete working conditions (e.g., scheduling) or whether the employer exercises physical control over the workplace does not fully address whether the employer controls meaningful economic aspects of the work relationship.”[38]
DOL noted that compliance with the law a is not ‘‘negative factor.[39] For example, “a home care agency requiring a criminal background check for all individuals with patient contact in compliance with a specific Medicaid regulation requiring such checks would not be indicative of control.”[40]
- However, “a potential employer’s control over compliance methods, safety, quality control, or contractual or customer service standards that goes beyond what is required by specific, applicable Federal, State, Tribal, or local law or regulation may in some—but not all— cases be relevant to the analysis of a potential employer’s control if it is probative of a worker’s economic dependence. For example, in contrast to the background check example in the prior paragraph, 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.’’[41]
- In this regard, “it is not indicative of control if a potential employer requires everyone who enters a construction site to wear a hard hat as required by city ordinance. However, if a potential employer chooses a specific time and location for its own weekly safety briefings that are not specifically required by law and requires all workers to attend, that may be probative of control. Similarly, it is not probative of control if a potential employer requires workers to provide proof of insurance required by state law, but if a potential employer mandates what insurance carrier workers must use, that may be probative of control.”[42]
And even if “compliance with specific safety, contractual, customer service, or quality control requirements is indicative of control in a specific case, this does not compel a particular conclusion that the control factor favors employee status or that the overall analysis requires a particular result. Thus, the final rule does not preclude a finding that a worker is an independent contractor where an employer obligates workers, for example, to comply with its own safety standards or quality control measures, after also considering other relevant actors in the economic reality analysis.”[43]
DOL “understands that parties representing a wide array of business relationships enter into contracts, and this regulation should not inhibit those practices. For example, if a potential employer requires all workers to sign a contract acknowledging that the business’s general policy is that invoices for work projects must be submitted within a particular timeframe, this is not indicative of control because such a generally applicable contractual term does not itself suggest that a worker is economically dependent on the employer for work. In contrast, if a potential employer requires all workers to sign a contract outlining specifically how, when, and where the work must be performed, that specific direction would be indicative of control because it suggests that the workers are not operating independently.”[44]
As to scheduling, DOL noted that “a worker’s ability to set their own schedule, by itself, provides only minimal evidence that a worker is an independent contractor, particularly when the hiring entity exerts other types of control; therefore, the freedom to set one’s schedule should be evaluated against other forms of control implemented by an employer.[45]
- And, “scheduling flexibility may be a relatively minor freedom, especially in those cases where a worker is prevented from exercising true flexibility because of the pace or timing of work or because the employer maintains other forms of control, such as the ability to punish workers who may seek to exercise flexibility on the job.”[46]
Finally, DOL assured that “the rule does not eliminate the relevance of the worker’s ability to control their schedule in the analysis, as the rule notes that ‘more indicia of control by the worker,’ such as control over one’s schedule, may ‘favor[ ] independent contractor status.’’’
As to supervision, DOL noted that “supervision can come in many different forms beyond physical ‘over the shoulder’ supervision, which may not be immediately apparent. For instance, supervision can be maintained remotely through technology instead of, or in addition to, being performed in person, such as when supervision is implemented via monitoring systems that can track a worker’s location and productivity, and even generate automated reminders to check in with supervisors. Additionally, an employer can remotely supervise its workforce, for instance, by using electronic systems to verify attendance, manage tasks, or assess performance.”[47]
In this regard, DOL explained that “control over the performance of work that is exercised by means of data, surveillance, or algorithmic supervision is relevant to the control inquiry under the economic reality test. Such tools could be used directly by the employer or on their behalf to supervise the performance of the work.”[48]
- Also, “if a potential employer is exercising control, but delegates it to a third party that is conducting onsite supervision and then reports that to the employer, then the same analysis regarding the employer’s supervision would apply.”[49]
But DOL acknowledged that “while the act of collecting data through monitoring systems could be used to supervise the performance of work, it might instead serve other operational needs of the employer not related to control.”[50]
In this regard, DOL acknowledged that “employers may at times use technology to track information critical to their business or, … the mere status of work performed by a worker. Such actions can be performed consistent with an independent contractor relationship with a worker, even when the data being collected is generated from the actions of the worker… However, … where such tracking is then paired with supervisory action on behalf of the employer such that the performance of the work is being monitored so it might then be directed or corrected, then this type of behavior may suggest that the worker is under the employer’s control.”[51]
And, “[l]ike monitoring, an employer may collect data on business operations for purposes unrelated to its relationship to workers. Yet, [DOL] recognizes that where the employer collects information that then is used for the purposes of supervision and thus goes beyond information collection, that may be probative of an employer’s control under this factor.”[52]
DOL also noted that, “training that is not a replacement for close supervision, such as apprising workers of safety protocols, would not necessarily be indicative of supervisory-like control.”[53]
DOL agreed that “a lack of supervision may be probative of a worker’s independent contractor status.”[54]
As to the setting of prices, DOL explained that “in a particular case, after considering all the facts of a particular relationship, control over pricing may be highly relevant to whether the control factor weighs in favor of employee or independent contractor status.”[55]
DOL emphasized that “a potential employer’s general control over the prices or rates for services—paid to the workers or set by the employer—is indicative of employee status. 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, this is relevant under the control factor.”[56]
But DOL also emphasized that it “does not intend for this fact to presuppose the outcome of employment classification decisions in any particular industry, occupation, or profession.”[57]
As to an individual’s ability to work for others, DOL explained that “the question is ‘whether a [worker’s] freedom to work when she wants and for whomever she wants reflects economic independence, or whether those freedoms merely mask the economic reality of dependence.’’’[58]
In this regard, DOL 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 one or all of those employers, as a matter of economic reality. 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.”[59]
DOL noted that it “does not believe that the ability to use applications or platforms to access work necessitates changing how the ability to work for others is weighed when determining employee or independent contractor status. [DOL] reiterates that as always, the overall test is economic dependence. Even if a worker has the ability to more fluidly move among potential employers while performing work by using multiple applications, this does not necessarily mean that the entire control factor weighs in favor of independent contractor status. Nor is it dispositive of whether the worker is in business for themself rather than being subject to the control of the entity for whom they are performing work at any given time.”[60]
Finally, DOL observed that “the ability to work for others is just one consideration within the control factor and agrees … that it is relevant, but not determinative, of whether the worker is an employee or independent contractor. Moreover, the control factor itself is not determinative of a worker’s status—the economic reality test is a totality-of-the circumstances test where no one factor is dispositive.”[61]
Extent to which the work performed is an integral part of the potential employer’s business

Thisfactor considers whether the workperformed is an integral part of thepotential employer’s business. Thisfactor does not depend on whether any individual worker in particular is an integral part of the business, but ratherwhether the function they perform is an integral part of the business.

This factorweighs in favor of the worker being an employee when the work they performis critical, necessary, or central to the potential employer’s principal business.

This factor weighs in favor of the workerbeing an independent contractor when the work they perform is not critical,necessary, or central to the potential employer’s principal business.

Preamble Example: Extent to Which the Work Performed Is an Integral Part of the Employer’s Business

A large farm grows tomatoes that it sells to distributors. The farm pays workers to pick the tomatoes during the harvest season. Because picking tomatoes is an integral part of farming tomatoes, and the company is in the business of farming tomatoes, the tomato pickers are integral to the company’s business. These facts indicate employee status under the integral factor.

Alternatively, the same farm pays an accountant to provide non-payroll accounting support, including filing its annual tax return. This accounting support is not critical, necessary, or central to the principal business of the farm (farming tomatoes), thus the accountant’s work is not integral to the business. Therefore, these facts indicate independent contractor status under the integral factor.

Preamble Guidance on How DOL Will Apply the Factor

DOL rejected the interpretation of this factor contained in the 2021 regulations, which DOL characterizes as a “rigid reading of Rutherford (which noted that the work was ‘‘part ofan integrated unit of production’’ of the employer).”[62]
But importantly, DOL explained that it “does not intend to preclude consideration of the potential relevance of the Supreme Court’s discussion of the ‘integrated unit of production’ in Rutherford. Consistent with the totality-of-the-circumstances approach, under which all relevant facts should be considered, [DOL] recognizes that the extent to which a worker is integrated into a business’s production processes may be relevant to the question of economic dependence or independence and may be considered under any relevant enumerated factor, or as an additional factor.”[63]
Elaborating on the interpretation DOL adopted, it explained that “[i]n 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.”[64]
DOL emphasized that “[t]he key limiting word … is ‘principal’ and only work that is critical, necessary, or central to the potential employer’s principal business is integral.”[65]
Finally, DOL acknowledged that “not all workers who perform integral work are employees, and there may be times when this factor misaligns with the ultimate result.”[66] DOL reiterated that “a worker can perform work that is integral to the potential employer’s business and still be considered an independent contractor under this final rule,”[67]
Skill and initiative

This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work.

Where the worker brings specialized skills to the work relationship, this fact is not itself indicative of independent contractor status because both employees and independent contractors may be skilled workers. It is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.

Preamble Example: Skill and Initiative

A highly skilled welder provides welding services for a construction firm. The welder does not make any independent judgments at the job site beyond the decisions necessary to do the work assigned. The welder does not determine the sequence of work, order additional materials, think about bidding the next job, or use those skills to obtain additional jobs, and is told what work to perform and where to do it. In this scenario, the welder, although highly skilled technically, is not using those skills in a manner that evidences business-like initiative. These facts indicate employee status under the skill and initiative factor.

A highly skilled welder provides a specialty welding service, such as custom aluminum welding, for a variety of area construction companies. The welder uses these skills for marketing purposes, to generate new business, and to obtain work from multiple companies. The welder is not only technically skilled, but also uses and markets those skills in a manner that evidences business-like initiative. These facts indicate independent contractor status under the skill and initiative factor.

Preamble Guidance on How DOL Will Apply the Factor

DOL noted that “a worker’s lack of specialized skills when performing the work generally indicates employee status, but … no one factor is dispositive, consistent with the overarching economic realities analysis.”[68]
DOL clarified that it is “focusing this factor on whether the worker uses their specialized skills in connection with business-like initiative—rather than only considering whether the worker has specialized skills—because that focus is probative of the ultimate question of economic dependence.”[69]
DOL explained that “[w]hen a worker lacks specialized skills, this factor will indicate employee status even if the worker exercises ‘the initiative of an independent business.’ That initiative, of course, is very relevant to the overall analysis, and the worker who lacks the specialized skills but exercises ‘the initiative of an independent business’ may very well be an independent contractor after considering all of the factors.”[70] DOL reaffirmed that “workers lacking specialized skills can be independent contractors when all of the factors are considered.”[71]
In response to concern expressed that “‘the NPRM’s interpretation [that] would ignore any initiative that is not attributable to an individual’s specialized skill,’ DOL explained that “any business initiative by a worker is plainly relevant to the analysis and may be considered under the opportunity for profit or loss depending on managerial skill factor and other factors.” And that “this rulemaking accounts for [a] comment that ‘[a] true measure of economic independence would not restrict the analysis of skill and initiative to considering only specialized skills and only initiative attributable to those skills but instead would consider ‘all major components open to initiative,’ such as ‘business management skills.’’ If not under the skill and initiative factor, the factors comprising the economic realities analysis certainly consider all types of initiative and business management skills by the worker.”[72]
Importantly, DOL clarified that “some basic training in a workplace, such as paying for a first-aid certification class, does not prevent a finding that a worker uses specialized skills to perform the work. Instead, the analysis is more general and, as the regulatory text states, should focus on whether the worker is dependent on training from the employer to perform the work.”[73]
Additional factors

Additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.

Preamble Guidance on How DOL Will Apply the Factor

DOL emphasized that “only factors that are relevant to the overall question of economic dependence or independence should be considered.’ …[And] this approach reflects the necessity of considering all facts that are relevant to the question of economic dependence or independence, regardless of whether those facts fit within one of the enumerated factors.”[74]
Conclusion

DOL offered its viewpoint that “[DOL] does not believe … that this rule will result in widespread reclassification of workers. That is, for workers who are properly classified as independent contractors, [DOL] does not, for the most part, anticipate that the guidance provided in this rule will result in these workers being reclassified as employees.”[75] We shall see.

* * *

If you have any questions or comments concerning the foregoing, please let me know, at [email protected] or (202) 659-0878.

The foregoing is intended solely as general information and may not be considered tax or legal advice; nor can it be used or relied upon for the purpose of promoting, marketing, or recommending to another party any transaction or matter addressed herein. You should not take any action based upon any information contained herein without first consulting legal counsel familiar with your particular circumstances.

[1] The “economic realities” test is the test that DOL and courts traditionally have applied to determine an individual’s status, as an employee or independent contractor, for purposes of the FLSA. It is broader than the common-law test, which is used for determining worker status for purposes of most other federal laws, including the Internal Revenue Code.

[2] Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 89 Fed. Reg. 1638, 1638 (Jan. 10, 2024).0

[3] Id.

[4] 89 Fed. Reg. 1638, 1648.

[5] 89 Fed. Reg. 1638, 1649.

[6] 89 Fed. Reg. 1638, 1665.

[7] DOL rejects an alternative interpretation of economic dependence that considers whether the worker has other sources of income or wealth or is financially dependent on the employer. 89 Fed. Reg. 1638, 1649.This alternative interpretation – which DOL rejects – would consider whether an individual is dependent on a company for the individual’s financial livelihood, and would also take into account whether the individual has other sources of income, e.g., independent wealth or also working at a job having nothing to do with the services the individual performs pursuant to the individual’s contractual relationship with the company. As noted, DOL rejects this alternative interpretation.

[8] 89 Fed. Reg. 1638, 1664.

[9] 89 Fed. Reg. 1638, 1673-74.

[10] 89 Fed. Reg. 1638, 1669.

[11] 89 Fed. Reg. 1638, 1670.

[12] 89 Fed. Reg. 1638, 1671.

[13] 89 Fed. Reg. 1638, 1673 (emphasis added).

[14] Id.

[15] 89 Fed. Reg. 1638, 1680.

[16] 89 Fed. Reg. 1638, 1672.

[17] 89 Fed. Reg. 1638, 1673 (emphasis added).

[18] 89 Fed. Reg. 1638, 1674 (emphasis added).

[19] 89 Fed. Reg. 1638, 1672.

[20] 89 Fed. Reg. 1638, 1675 (emphasis added).

[21] 89 Fed. Reg. 1638, 1675-76 (emphasis added).

[22] 89 Fed. Reg. 1638, 1675.

[23] Id.

[24] 89 Fed. Reg. 1638, 1682 (emphasis added).

[25] 89 Fed. Reg. 1638, 1682 (emphasis added).

[26] 89 Fed. Reg. 1638, 1678.

[27] 89 Fed. Reg. 1638, 1682.

[28] 89 Fed. Reg. 1638, 1677.

[29] 89 Fed. Reg. 1638, 1678-79 (emphasis added). DOL reaffirms that “comparing the qualitative (rather than primarily the quantitative) value of the investments is a better indicator of whether the worker is economically dependent on the employer for work or is in business for themself.” 89 Fed. Reg. 1638, 1684.

[30] 89 Fed. Reg. 1638, 1679.

[31] 89 Fed. Reg. 1638, 1680 (emphasis added). DOL reiterates that “focusing on the nature of the investments and whether they are capital or entrepreneurial in nature is most probative of whether the worker is economically dependent on the employer for work or in business for themself. Consistent with that focus, there is no minimum-dollar threshold or requirement that the investment be ‘large’ or of a certain level for a worker’s investment to be capital or entrepreneurial in nature.” 89 Fed. Reg. 1638, 1681.

[32] 89 Fed. Reg. 1638, 1681.

[33] 89 Fed. Reg. 1638, 1687.

[34] 89 Fed. Reg. 1638, 1687.

[35] 89 Fed. Reg. 1638, 1689.

[36] 89 Fed. Reg. 1638, 1690 (emphasis added).

[37] 89 Fed. Reg. 1638, 1687 (emphasis added).

[38] 89 Fed. Reg. 1638, 1693.

[39] 89 Fed. Reg. 1638, 1694.

[40] 89 Fed. Reg. 1638, 1694 (emphasis added).

[41] Id. (emphasis added).

[42] 89 Fed. Reg. 1638, 1694-95.

[43] 89 Fed. Reg. 1638, 1695.

[44] 89 Fed. Reg. 1638, 1694.

[45] 89 Fed. Reg. 1638, 1695 (emphasis added).

[46] 89 Fed. Reg. 1638, 1697 (emphasis added).

[47] 89 Fed. Reg. 1638, 1699.

[48] 89 Fed. Reg. 1638, 1700.

[49] 89 Fed. Reg. 1638, 1699.

[50] Id.

[51] 89 Fed. Reg. 1638, 1701 (emphasis added).

[52] 89 Fed. Reg. 1638, 1700.

[53] 89 Fed. Reg. 1638, 1699-70.

[54] 89 Fed. Reg. 1638, 1700.

[55] 89 Fed. Reg. 1638, 1702 (emphasis added).

[56] 89 Fed. Reg. 1638, 1703.

[57] Id. In this regard, DOL reiterated that “[a]n employer’s control over pricing should be one fact among all other facts considered under the control factor as it may be probative of a worker’s economic dependence on a potential employer.” Id.

[58] 89 Fed. Reg. 1638, 1704.

[59] 89 Fed. Reg. 1638, 1705.

[60] Id.

[61] 89 Fed. Reg. 1638, 1706.

[62] 89 Fed. Reg. 1638, 1707.

[63] 89 Fed. Reg. 1638, 1707-08.

[64] 89 Fed. Reg. 1638, 1707.

[65] 89 Fed. Reg. 1638, 1710 (emphasis added).

[66] Id.

[67] Id.

[68] 89 Fed. Reg. 1638, 1711.

[69] 89 Fed. Reg. 1638, 1714 (emphasis added).