The U.S. Department of Labor Wage and Hour Division finalized a new rule that adopts an economic reality test that includes six distinct factors to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act. The rule will go into effect on March 11, 2024. It is particularly important for school districts that may consider or treat certain types of workers as independent contractors when they may be employees under the new rule.
In January 2024, the U.S. Department of Labor Wage and Hour Division updated Fact Sheet 13 to reflect the changes outlined in the new rule. Fact Sheet 13 is linked here. Fact Sheet 13 also provides examples of applying the economic reality test and its factors to a relationship.
Six Distinct Factors – Economic Realities Test
The new rule focuses on the economic realities of the worker’s relationship with the employer. The economic realities are assessed by applying six factors to the relationship to determine the extent that the worker is economically dependent on the employer for work. However, the U.S. Department of Labor stresses that no one factor is necessarily dispositive.
1 - The opportunity for profit or loss depending on managerial skill. Whether a worker can earn profits or suffer losses through their own independent effort and decision-making. Independent effort and decision-making weigh in favor of independent contractor status.
2 - The investments by the worker and the potential employer. Whether a worker makes investments that are capital or entrepreneurial in nature. Lack of investments weighs in favor of employee status.
3 - The degree of permanence of the work relationship. What is the nature and length of the work relationship? Work that is fixed in duration, and the ability of the worker to take on or perform multiple different jobs weigh in favor of independent contractor status.
4 - Nature and degree of control. What is the level of control the employer has over the performance of the work? Subfactors to consider in terms of “control” include: hiring, firing, scheduling, pricing, pay rates, etc... More control on the part of the employer weighs in favor of employee status.
5 - The extent to which the work performed is an integral part of the potential employer’s business. Is the work is critical, necessary, or central to the employer’s principal business? If yes, the factor weighs in favor of employee status.
6 - Skill and initiative. Whether the worker uses their specialized skills and effort to perform the work and to support or grow a business. The focus of this factor is on the business initiative. If that is present, then the factor weighs in favor of independent contractor status.
The new rule is significant for employers in making the correct determination about whether a worker is an employee or an independent contractor. If a worker is an employee, the employer must then be mindful of Wage and Hour provisions including but not limited to minimum wage, overtime, recordkeeping requirements, retaliation protections, and the like.