The U.S. Department of Labor (DOL) has published a final rule for independent contractor classification under the federal Fair Labor Standards Act (FLSA). Beginning on March 11, 2024, the rule will effectively reinstate the longstanding version of the “economic reality” test the DOL previously used. This test uses a multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee who is economically dependent on the employer for work, or an independent contractor (IC) who is in business for themself.
Although this version of the economic reality test hasn’t been used by the DOL for the last few years, many state agencies and courts continued to use it, and the IRS’s test for IC classification is very similar, so most employers likely did not take action to reclassify employees during the test’s brief DOL hiatus. That said, it never hurts to reevaluate your classifications. As a refresher, the economic reality test looks at the following six factors:
- The worker’s opportunity for profit or loss
- The relative investments by the worker and the employer
- The degree of permanence of the work relationship
- The nature and degree of control an employer has over the person’s work
- Whether the work the person does is essential to the employer’s business
- The worker’s skill and initiative
Keep in mind that some states have more stringent tests (e.g., the ABC test in California), and workers in those states will need to pass the state’s test in order to be properly classified as independent contractors. More information can be found on the DOL website.
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