Department of Labor Revises Independent Contractor Test  |  By: Pooja S. Nair
Department of Labor Revises Independent Contractor Test  |  By: Pooja S. Nair

On March 11, 2024, the U.S. Department of Labor’s (“DOL”) revised independent contractor test took effect, under a Final Rule issued by the Wage and House Division of DOL. The rule for Employee or Independent Contractor Classification under the Fair Labor Standard Act (“FLSA”) was published on January 10, 2024.

The Final Rule applies the following six factors to determine whether an individual is an employee or independent contractor under the FLSA:

(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.

The DOL’s Frequently Asked Questions note that “[n]o factor or set of factors among this list of six has a predetermined weight, and additional factors may be relevant if such factors in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work (i.e., an employee under the FLSA).”

Importantly, the final rule rescinded a previous test, promulgated by the DOL in 2021 (the “2021 Rule”).  The 2021 Rule emphasized two “core” factors: the nature and degree of the individual’s control over the work and the individual’s opportunity for profit or loss. After President Biden was elected and his administration took office, the DOL initially delayed implementing the 2021 Rule and then withdrew it completely in May 2021. The DOL’s action was challenged in court, and a federal court in Texas found that the agency’s rule withdrawal and delay was unlawful. The DOL then issued the Final Rule in January 2024.

The DOL is not the only federal agency to update its independent contractor test. The Internal Revenue Service (“IRS”) simplified its 20-factor test in 2020, and its Publication 15-A now sets out three categories of facts to determine whether someone is an employee or independent contractor. The three categories the IRS uses are behavioral control, financial control, and type of relationship. 

Although the DOL and IRS independent contractor tests are important as they will be applied in various federal and tax situations, California employers must continue to adhere to the stricter ABC test and the various exceptions set forth in Labor Code section 2775, et. seq.


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