Are you an Employee or Independent Contractor? DOL Final Rule returns to Economic Reality Test

With the growth of gig work following the COVID-19 pandemic, a worker may question whether they are being misclassified as an independent contractor. Most worker protections under federal and state law only apply to workers who are considered employees, as opposed to independent contractors. This month, the U.S. Department of Labor issued a final rule, effective March 11, 2024, that will make it easier for workers to gain access to much-needed employee protections.

Under the Fair Labor Standards Act (FLSA), the federal law that provides minimum wage and overtime protections, workers are only protected if they are employees. This means that independent contractors do not receive these protections.

For decades, courts applied an “economic realities test” to determine whether workers are employees or independent contractors. The core question was whether a worker is truly economically dependent and works for themselves. Courts approached this test considering the “totality of the circumstances”, or essentially, looking at the circumstances as a whole instead of limiting the analysis to only specific factors. Some of the factors included the worker’s opportunity for profit or loss, investments made by the worker and the employer, the degree of permanence of the relationship, the degree of control the worker has over their work, the extent to which the work is performed as an integral part of the employer’s business and the worker’s skills and initiative.

In January 2021, the Department of Labor departed from this longstanding precedent, issuing a final rule that limited what information could be considered in evaluating an employment relationship.

In a return to longstanding precedent, the new final rule reinstates the original economic realities test. When the final rule is expected to take effect on March 11, 2024, worker relationships will again be analyzed under the totality of circumstances analysis, where no factor weighs more than any other and there is consideration for the economic reality of the employment relationship. The rule also provides for broader discussion on how factors like scheduling work hours, remote supervision, price setting and whether workers have the freedom to work for others, should be considered when determining how much control a worker exercises in the relationship.