Effective March 11, 2024, the US Department of Labor’s Final Rule, called the Employee or Independent Contractor Classification Under the Fair Labor Standards Act, is expected to create further limitations for millions of entrepreneurs classified as independent contractors. This new interpretation relies on the “economic reality” test, which states that if a worker is economically dependent on an employer for work, they are to be classified as an employee and not an independent contractor.
To determine this economic reality, the new rule considers six factors:
- The worker’s opportunity for profit and loss. Does the worker have the option to negotiate prices for work or decline assignments and projects? Is the worker engaging in activities to expand their business or find more work? Does the worker make their own decisions about hiring, workspace rentals, etc.? Independent contractors have more freedom and responsibilities for their own income and growth.
- Investments made by both worker and potential employer. Workers making similar investments as their employer—even if on a much smaller scale—to grow their own business suggests independent operations.
- Work relationship permanence. Work that is indefinite, continuous or exclusive signals an employee relationship. Independent contractor work is definite in duration, non-exclusive and project-based or sporadic.
- The nature and degree of control. Who controls the work schedule and rates for services? If there is performance supervision or a limitation on whether or not the worker can pursue other clients, independent contractor status is in question.
- The importance of the work for the business. This does not analyze how integral an individual is to the operations, but rather how integral their function is to the overall business. If the work is central or critical to the success of the operation, the worker would be considered an employee.
- Specialized skills and initiative. It is not specialized skills that are the determining factor, but whether or not a worker using specialized skills does so “in connection with business-like initiative” indicative of an independent contractor.
This final rule provides additional context beyond the previous Independent Contractor Rule from 2021, particularly further insight and analysis of the “control factor”, which encompasses scheduling, price-setting, supervision and the freedom to work for others.
The Direct Selling Association (DSA) released a statement strongly opposing the final rule, stating that it “dismisses valid criticisms raised in the Notice of Proposed Rulemaking by DSA and could require high investments to start a business, limits the use of technology, diminishes high self-regulatory standards and disregards conflicting federal statutes defining direct sellers as independent contractors.”
Further, the DSA announced it will “support efforts to ensure the rule does not take effect and continue to support more statutory clarity including H.R. 5419, bi-partisan legislation that clearly defines direct sellers as independent contractors.”
