The U.S. Department of Labor (DOL) announced the issuance of a Final Rule on January 9, which revises the federal framework for determining whether a worker is classified as an employee or an independent contractor under the Fair Labor Standards Act (FLSA).  This is important because FLSA protections such as minimum wage and overtime pay apply to employees but not to independent contractors, and many observers expect the new rule to result in more individuals being classified as employees.

This final rule will be effective on March 11, 2024.

Summary of Regulatory Changes 

For decades the Department of Labor and courts have applied an “economic reality” test to determine the appropriate FLSA classification.  The core question in this analysis is whether, as a matter of economic reality, a worker is either economically dependent on the employer for work (and is thus an employee) or is in business for themself (and is thus an independent contractor).

The Final Rule announced by DOL rescinds a previously issued Independent Contractor rule that became effective in March 2021. That prior rule identified five relevant factors:

• the nature and degree of control over the work
• the worker’s opportunity for profit or loss
• the amount of skill required for the work
• the degree of permanence of the working relationship between the worker and the employer
• whether the work is part of an integrated unit of production

The 2021 rule designated the first two as “core factors” that are most relevant to and carry the most weight in the analysis, while the other three have less probative value.

The new rule replaces the prior rule with a “totality-of-the-circumstances” framework under which six factors will be used to assess the economic realities of a working relationship, with none of them being designated as “core”—in other words, with no predetermined weighting:

• the worker’s opportunity for profit or loss depending on managerial skill
• investments by the worker and the organization
• the degree of permanence of the work relationship
• the nature and degree of the organization’s control over performance of the work and economic aspects of the working relationship
• the extent to which the work performed is an integral part of the organization’s business
• whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative

The rule states that additional factors may also be relevant, though it does not define those factors, meaning the six factors will not be exhaustive in every case.

Implications

The final rule will likely result in more individuals being classified as employees for purposes of federal law than under the 2021 independent contractor rule that is now rescinded.  The full impact remains to be seen, and will vary depending on organizations’ business models, approaches to independent contractor classification, and on court decisions that have interpreted the FLSA requirements and established standards that apply in different jurisdictions across the country.

While there is some similarity between the factors identified in the 2021 rule and those identified in the new final rule, there are differences that must be analyzed to determine the appropriate classification for an individual.  For example, one factor affecting aging services and other healthcare providers relates to the degree of “control” an organization exercises, or reserves the right to exercise, over the performance of work.  In response to comments, DOL amended its proposed rule to clarify that actions taken by a potential employer for the purpose of complying with a specific, applicable law or regulation, such as requiring a worker to complete a state-required background check, are not indicative of control, which is consistent with the 2021 rule.  But even with that clarification, application of the “control factor,” as it is defined in the new rule will require analysis given other regulatory language DOL has now included.

It is clear that the Department of Labor’s goal is to reduce what it sees as misclassification of individuals as independent contractors, an issue that the agency says affects a wide range of workers in the home care, janitorial services, trucking, delivery, construction, personal services, and hospitality and restaurant industries, among others. DOL has put a strong emphasis on ensuring proper classifications through enforcement activity over the past few years, and we can expect those efforts to continue.

LeadingAge will continue to analyze the newly published rule and its implications for providers, and we will provide additional information in the weeks ahead.

This final rule will be effective on March 11, 2024, and DOL has posted a Frequently Asked Questions resource that summarizes certain key issues.