Independent Contractor Test
In March of 2024, the United States Department of Labor (DOL) finalized their rule on the guidance used for Independent Contractor (IC) classification. The rule effectively reinstates the longstanding version of the “economic reality” test the DOL used prior to the 2021 IC Rule, striving to provide more consistency with the Fair Labor Standards Act (FLSA) interpretation.
The final rule applies six factors to analyze employee or independent contractor status under the FLSA. here is a list of those factors, as well as examples showing if the person would fall under Employee (EE) or independent Contractor (IC) classification.
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1. Opportunity for profit or loss depending on managerial skill
IC: A freelance graphic designer has the ability to set the prices of their services and choose their contract terms. They could suffer losses with poorly managed projects, or they would gain profits if they manage their resources and time properly.
EE: A company hires a graphic designer who is paid a set wage without the opportunity to increase/decrease their earnings based on their efficiency of their projects.
2. Investments by the worker and the potential employer
IC: A plumber uses their own equipment and provides the products needed to complete their jobs. The plumber is responsible for maintaining their vehicle and tools.
EE: An IT support specialist uses office supplies, software, and a laptop provided by the company. The company takes on the expenses of any required technology or tools.
3. Degree of permanence of the work relationship
IC: A web developer is hired by a company to build out their new website over a span of 8 weeks, but once the website is completed, they move on to provide their services to other clients.
EE: An office admin is working for a company and their employment does not have a set end date.
4. Nature and degree of control
IC: A content writer can work in any location they chose, during any hours of the day, as long as they complete the final product based on the agreed specifications.
EE: A waitress has to follow a set schedule, following specific processes determined by the company, and is supervised.
5. Extent to which the work performed is an integral part of the potential employer’s business
IC: A company hires a sales consultant to provide advice on improving their sales approach, but the company’s core function is manufacturing.
EE: A cashier at a coffee shop performs duties that are essential to the company’s operations.
5. Skill and initiative
IC: An electrician takes on multiple projects and leverages their specialized skills to complete tasks, which contributes to their business initiatives.
EE: A customer service representative answers customer’s calls, following any outline procedures and scripts, with very limited opportunity to change how their job is completed.
The DOL has provided a list of FAQ regarding Employee or Independent Contractor Classification Under the FLSA.
As a reminder, some states have more rigorous tests, in which workers would have to pass the state’s IC test to be classified as an independent contractor.
When assessing the IC factors, employers will need to look at their answers as a whole to determine whether the worker acts and is treated more like an employee or more like an independent contractor. No single factor within the economic reality test stands alone in making this determination, as some factors may indicate that the worker is an independent contractor, while others indicate that the worker is an employee. At the end of the analysis, look at the entire relationship and consider the extent of the right to direct and control the worker as well as the economic realities of the situation.
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