January 15, 2024

DOL Issues Final Rule on Worker Classification

There has long been concern that workers have been improperly classified as independent contractors to avoid required pay minimums, insurance benefits, overtime pay, and other employment-based protections. Earlier this month, the Department of Labor (DOL) issued Employee or Independent Contractor Classification Under the Fair Labor Standards Act (FSLA). This new guidance relies on the economic reality test supported by various reality factors. These include worker opportunity for profit or loss, nature, and degree of control over the work, permanency of the work relationship, and more. Other factors may be considered when determining economic dependence on the employer. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

What is the Economic Reality Test?

It is a test that examines multiple factors to determine if an employment relationship exists under the FLSA. The purpose is to determine whether a worker is economically dependent on an employer or is instead in business for themselves. The test does not consider a single factor but rather evaluates the relationship by a totality of factors. There are six primary areas of consideration including opportunity for loss or profit, investments made by both the worker and employer, permanence of the relationship, nature, and degree of control, whether the work performed is integral to the company, and skill and initiative.

Explanation of Economic Reality Factors

• Opportunity for Profit or Loss Based on Managerial Skill – This factor evaluates whether a worker can earn profits or suffer losses through independent decision-making. Key factors include whether the worker negotiates pay, can decline work, hires workers, or engages in efforts to increase business through marketing or advertising. To be considered an independent contractor, a worker must have the real opportunity to acquire additional work but elect not to due to the lack of profit potential. Not having the opportunity to make such an evaluation (needs to receive employer approval to take on new work) means the worker is an employee.
• Investments By Worker and Employer – This factor evaluates whether the worker makes investments that are capital or entrepreneurial in nature. Investments made to support the growth of the business, including those that drive cost reductions or new sales, suggest an independent contractor. An absence of such investments suggests, the worker is an employee. In addition, worker investments should also be compared to the employer’s investment in its business. The focus is on whether the worker makes similar investments that allow them to operate independently.
• Permeance of Work Relationship – This factor evaluates the nature and length of the relationship. Sporadic work or project work with a fixed ending date that allows the worker to take on multiple projects indicates an independent contractor. Work that is continuous and does not have an established ending date indicates employee status.
• Nature and Degree of Control – This factor evaluates the amount of control the employer has over the performance of work including economic aspects of the relationship. Important factors include whether the employer controls hiring, firing, scheduling, price, pay rates, directly supervises work, or takes action that can limit the ability to acquire additional opportunities. When the worker maintains control of these factors they are likely an independent contractor, if not then it weighs in favor of an employee relationship.
• Work Performed is an Integral Part of Employer’s Business – This factor determines whether the work performed is critical, necessary, or integral to the employer’s business. When it is critical then it is likely there is an employee relationship. When the work performed is not critical to the business then it is likely an independent contractor relationship.
• Skills and Initiative – This factor evaluates whether workers use their specialized skills along with business planning to perform assigned duties and grow a business. If a worker does not use specialized skills but rather relies on employer training indicates an employee relationship. The key issue is whether the skills are used in connection with business initiatives. If a worker does, then it is likely an independent contractor-relationship.

Contact Us

While the final rule is not effective until March 24, 2024, it is important to become familiar with the new framework and the various economic reality factors. It may be necessary to consult a qualified advisor who can guide you through the process. If you have questions about the information outlined above or need assistance with a tax or audit issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.