On January 9, 2024, the U.S. Department of Labor released the details of a long-awaited “final rule” addressing when employers can classify workers as independent contractors under federal labor law. Our overall assessment of the FLSA “final rule” (effective March 11, 2024) (the “2024 Rule”) is that it will not materially impact independent contractor misclassification agency enforcement actions or court litigation.
First, the 2024 Rule is limited to FLSA actions. In fact, many agency enforcement actions and lawsuits involve the interpretation and enforcement of state misclassification laws, which often have far more restrictive tests than the FLSA concerning viable independent contractor classification. This is especially true in states like California and Massachusetts which use the ABC Test which we have extensively written about in earlier Perspectives newsletters. In other words, it has been and remains very difficult under any legal standard for a hiring company to viably classify workers as independent contractors and the 2024 Rule marks another step in that direction.
Second, the 2024 Rule essentially marks a return or roll back to the six-factor Economic Realities Test which has largely been in place for FLSA guidance for decades with the exception of the Trump administration-backed departure(s) which culminated in the 2021 Rule (which, ironically, was also referred to as a “final rule”). For context, the six-Factor Economic Realities Test which is, once again, the gold standard for FLSA guidance, is described as follows in the FAQs published by the DOL concerning the 2024 Rule:
“Consistent with judicial precedent and the Department’s interpretive guidance prior to 2021, the [2024] final rule applies the following six factors 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 [2024] final rule provides detailed guidance regarding the application of each of these six factors. No factor or set of factors among this list of six has a predetermined weight, and additional factors may be relevant if such factors in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work (i.e., an employee under the FLSA).”
The 2021 Rule, which the 2024 Rule replaces, sought to simplify the Economic Realities Test by adding in more certainty and less ambiguity to the analysis; that was the professed goal. Specifically, as stated in the 2021 Rule’s text: “The final [2021] rule sharpens this inquiry into five distinct factors, instead of the five or more overlapping factors used by most courts and previously the Department. Moreover, consistent with the FLSA’s text, its purpose, and the Department’s experience administering and enforcing the Act, the [2021] final rule explains that two of those factors—(1) the nature and degree of the worker’s control over the work and (2) the worker’s opportunity for profit or loss—are more probative of the question of economic dependence or lack thereof than other factors, and thus typically carry greater weight in the analysis than any others.” 29 CFR Parts 780, 788 and 795.
Consequently, we don’t see the 2024 Rule as moving the needle in any significant direction aside from demonstrating that the FLSA will not be used as a vehicle for weakening the labor market’s ability to obtain employment law protections.
Hope this provides some useful guidance. The FAQs published by the DOL (referenced above) are also helpful if you’d like a more comprehensive overview. https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking/faqs#g1
Scherer Smith & Kenny LLP remains available to guide you through these and other nuances in California’s dynamic and ever-changing employment law arena. For additional information, please contact Denis Kenny at [email protected], Ryan Stahl at [email protected], John Lough, Jr. at [email protected], or Jaclyn Tran at [email protected].
-Written by Denis Kenny