Effective July 1, 2024, the Department of Labor’s new independent contractor rules provide guidelines for distinguishing between employees and non-employee independent contractors, for purposes of the overtime and minimum wage requirements of the Fair Labor Standards Act. As explained below, the DOL rules closely parallel the test that the Fourth Circuit has historically applied in FLSA cases.
Statutory and Regulatory Background
The FLSA requires covered employers to pay minimum wages and overtime compensation to certain categories of employees. 29 U.S.C §§ 206-207. The FLSA also imposes recordkeeping requirements on employers. 29 U.S.C. § 211. These requirements raise questions about what it means to be an “employer” or an “employee,” and, more specifically, about the nature of the employment relationship that falls within the scope of the FLSA’s minimum wage and overtime requirements.
The FLSA itself defines these terms broadly, but without great clarity. Section 203 of the FLSA defines “employer” to include “any person acting directly or indirectly in the interest of an employer in relation to an employee[.]” 29 U.S.C. § 203(d). The FLSA defines the term “employee” to generally mean “any individual employed by an employer.” 29 U.S.C. § 203(e). And it defines “employ” as “includes to suffer or permit to work.” 29 U.S.C. § 203(g).
In FLSA cases, disputes often arise as to whether a worker is an “employee,” entitled to minimum wages and overtime under the FLSA, or a non-employee “independent contractor” to which the FLSA does not apply. Sometimes, workers are misclassified as independent contractors, when under the FLSA they are really employees.
The Fourth Circuit’s Employee / Independent Contractor Test
The Fourth Circuit has historically assessed whether a worker is an employee or a non-employee independent contractor using a six-factor “economic realities” test. The factors are:
(1) the degree of control that the putative employer has over the manner in which the work is performed;
(2) the worker’s opportunities for profit or loss dependent on his managerial skill;
(3) the worker’s investment in equipment or material, or his employment of other workers;
(4) the degree of skill required for the work;
(5) the permanence of the working relationship; and
(6) the degree to which the services rendered are an integral part of the putative employer’s business.
Schultz v. Capital Int’l Sec., Inc., 466 F.3d 298 (4th Cir. 2006). “These factors are often called the ‘Silk factors.’ No single factor is dispositive; the test is designed to capture the economic realities of the relationship between the worker and the putative employer.” Id. (Derived from United States v. Silk, 331 U.S. 704, 67 S. Ct. 1463 (1947)).
The 2024 DOL Employee / Independent Contractor Test
The DOL’s 2024 employee / independent contractor regulations adopt a totality of the circumstances, economic realities test that is consistent with the historical Fourth Circuit test:
Of particular note, the regulations set forth in this final rule do not use “core factors” and instead return to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.
Employee or Independent Contractor Classification Under the FLSA, 89 Fed. Reg. 1638 (Jan. 10, 2024) (Amending 29 C.F.R. § 795).
The 2024 DOL factors closely parallel the Silk factors discussed above and historically applied by the Fourth Circuit. Shortened, they are:
(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.
29 C.F.R. 795.110. “Additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.” Id. Thus, like the Fourth Circuit, the DOL embraces an economic realities test that balances the relevant factors.
And like the Fourth Circuit explained in Schultz, the ultimate inquiry in using the factors is still “whether the [workers] were, as a matter of economic reality, dependent on the business they served, or, conversely, whether they were in business for themselves.” Schultz v. Capital Int’l Sec., Inc., 466 F.3d 298 (4th Cir. 2006). See also Employee or Independent Contractor Classification Under the FLSA, 89 Fed. Reg. 1638 (Jan. 10, 2024) (Amending 29 C.F.R. § 795) (“The ultimate inquiry is whether, as a matter of economic reality, the worker is economically dependent on the employer for work (and is thus an employee) or is in business for themself (and is thus an independent contractor).”)
Thus, the DOL’s 2024 FLSA independent contractor test is similar to the economic realities test historically applied in the Fourth Circuit. Both tests consider the same basic factors in their totality.
Special thanks to Hannah Wyatt for her work on this post!
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