On January 10, 2024, the U.S. Department of Labor published a final rule, Employee or Independent Contractor Classification Under the Fair Labor Standards Act, revising the Department’s guidance on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA). This final rule rescinds an earlier rule published on January 7, 2021 (2021 Independent Contractor Rule) and replaces it with an analysis for determining employee or independent contractor status that is more consistent with the FLSA as interpreted by decades of court decisions. The Department believes that this final rule will reduce the risk that employees are misclassified as independent contractors, while providing added certainty for businesses that engage (or wish to engage) with individuals who are in business for themselves.
The final rule is scheduled to take effect on March 11, 2024.
- Overview of The Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act
- The Six Factors of The Economic Reality Test
- Common Questions
- Additional Resources
Overview of The Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act
To Whom Does the FLSA Apply?
The FLSA is a federal law that establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time employees in the private sector and in federal, state, and local governments. For example, the FLSA generally requires covered employers to pay nonexempt employees at least the federal minimum wage for all hours worked and overtime pay of at least one and one-half times the employee’s regular rate of pay for every hour worked over 40 in a workweek. The FLSA also regulates the employment of children, prohibits employers from taking employee tips, and requires employers to provide reasonable break time and a place for covered nursing employees to express breast milk at work. Finally, the FLSA requires covered employers to maintain certain records about their employees and prohibits retaliation against employees who attempt to assert their rights under the Act. The FLSA’s protections do not apply to independent contractors.
The FLSA does not define “independent contractor.” Courts have held that, under the FLSA, the question 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). Independent Contractors play an important role in the economy and are commonly referred to by different names, including independent contractors, self-employed individuals, and freelancers.
What determines whether a worker is an employee or independent contractor under the FLSA?
There is no single rule for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. Rather, an “economic reality test” looks to the facts of a situation, rather than assuming that a written label, contractual arrangement, or form of business decides if a worker is economically dependent on an employer. In assessing economic dependence, courts and the Department have historically analyzed the circumstances of the employment relationship, considering multiple factors to analyze whether a worker is an employee or an independent contractor, with no factor or factors having predetermined weight.
To analyze if a worker is an employee or independent contractor, the final rule provides six factors that businesses and workers should consider when analyzing the economic realities of the working relationship. These factors, described in the economic reality test of the final rule, 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.
No one factor or subset of factors determines if a worker is an employee or independent contractor. Rather, all the circumstances of the relationship should be examined. The weight given to each factor may depend on the facts and circumstances of the particular relationship. Also, additional factors may be relevant if they in some way indicate if the worker is in business for themself as opposed to being economically dependent on the employer for work.
The Six Factors of The Economic Reality Test
To analyze if a worker is an independent contractor or employee under the FLSA, the final rule considers the six factors listed below.
Factor One: Opportunity for Profit or Loss Depending on Managerial Skill
Does the worker have opportunities for profit or loss based on managerial skill that affect the worker's economic success or failure? Managerial skill can include initiative or business expertise or judgment. The following facts, among others, can be relevant in the determination:
- Whether the worker determines or can meaningfully negotiate the charge or pay for the work provided;
- Whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed;
- Whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and
- Whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.
If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee. Some decisions by a worker that can affect the amount of pay that a worker receives, such as the decision to work more hours or take more jobs when paid a fixed rate per hour or per job, generally do not reflect the exercise of managerial skill indicating independent contractor status under this factor.
Examples: Opportunity for Profit or Loss Depending on Managerial Skill
- Example 1: A worker for a landscaping company performs assignments only as decided by the company for its corporate clients. The worker does not independently choose assignments, ask for additional work from other clients, advertise the landscaping services, or try to reduce costs. The worker regularly agrees to work additional hours to earn more money. In this example, the worker does not exercise managerial skill that affects their profit or loss. Rather, their earnings may change based on the work available and their willingness to work more. Because of this lack of managerial skill affecting their opportunity for profit or loss, these facts indicate employee status under the opportunity for profit or loss factor.
- Example 2: In contrast, a worker provides landscaping services directly to corporate clients. The worker produces their own advertising, negotiates contracts, decides which jobs to perform and when to perform them, and decides when and whether to hire helpers to assist with the work. This worker exercises managerial skill that affects their opportunity for profit or loss. These facts indicate independent contractor status under the opportunity for profit or loss factor.
Factor Two: Investments by the Worker and the Potential Employer
Are any investments by a worker capital or entrepreneurial in nature? The following facts, among others, can be relevant in that determination:
- Costs to a worker of tools for a specific job and costs that the employer imposes on the worker are not capital or entrepreneurial investments that indicate independent contractor status. Investments that are capital or entrepreneurial in nature and indicate independent contractor status generally support an independent business and serve a business-like function, such as increasing the worker's ability to do different types of or more work, reducing costs, or extending market reach.
- Additionally, the worker's investments should be considered on a relative basis with the potential employer's investments in its overall business. The worker’s investments do not have to be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of the investments. The focus should be on whether the worker makes similar types of investments as the employer (even if on a smaller scale) or investments of the type that would allow the worker to operate independently in the worker’s industry or field. Such investments by the worker in comparison to the employer weigh in favor of independent contractor status, while a lack of investments that support an independent business indicate employee status.
Examples: Investments by the Worker and the Potential Employer
- Example 1: A graphic designer provides design services for a commercial design firm. The firm provides software, a computer, office space, and all the equipment and supplies for the worker. The company invests in marketing and finding clients and maintains a central office from which to manage services. The worker occasionally uses their own preferred drafting tools for certain jobs. In this scenario, the worker's relatively minor investment in supplies is not capital in nature and does little to further a business beyond completing specific jobs. These facts indicate employee status under the investment factor.
- Example 2: A graphic designer occasionally completes specialty design projects for the same commercial design firm. The graphic designer purchases their own design software, computer, drafting tools, and rents their own space. The graphic designer also spends money to market their services. These types of investments support an independent business and are capital in nature (e.g., they allow the worker to do more work and find new clients). These facts indicate independent contractor status under the investment factor.
Factor Three: Degree of Permanence of the Work Relationship
Is the work relationship indefinite in duration, continuous, or exclusive of work for other employers? That would weigh in favor of the worker being an employee. Is the work relationship indefinite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple businesses? That would weigh in favor of the worker being an independent contractor.
- This may include regularly occurring fixed periods of work, although the seasonal or temporary nature of work by itself would not necessarily indicate independent contractor classification.
- Where an individual cannot perform work on a permanent basis due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ, then this factor would not necessarily indicate independent contractor status unless the worker is exercising their own independent business initiative.
Examples: Degree of Permanence of the Work Relationship
- Example 1: A cook has prepared meals for an entertainment venue continuously for several years. The cook prepares meals as decided by the venue, depending on the size and specifics of the event. The cook only prepares food for the entertainment venue, which has regularly scheduled events each week. The relationship between the cook and the venue is characterized by a high degree of permanence and exclusivity as the cook does not cook for other venues. These facts indicate employee status under the permanence factor.
- Example 2: A cook has prepared specialty meals intermittently for an entertainment venue over the past three years for certain events. The cook markets their meal preparation services to multiple venues and private individuals and turns down work from the entertainment venue for any reason, including because the cook is too busy with other meal preparation jobs. The cook has a sporadic or project-based nonexclusive relationship with the entertainment venue. These facts indicate independent contractor status under the permanence factor.
Factor Four: Nature and Degree of Control
Does the potential employer have control, including reserved control over the performance of the work and the economic aspects of the working relationship?Reserved control means the employer has the right to control even if they do not actually exercise the control. An example of reserved control is if an employer reserves the right to discipline a worker for declining assignments.
Facts relevant to the potential employer's control over the worker include whether the potential employer:
- sets the worker's schedule;
- supervises the performance of the work;
- explicitly limits the worker's ability to work for others, or places demands or restrictions on workers that do not allow them to work for others or work when they choose;
- uses technological means to supervise the performance of the work (such as by means of a device or electronically);
- reserves the right to supervise or discipline workers; or
- controls economic aspects of the working relationship, such as the prices or rates for services and the marketing of the services or products provided by the worker.
Actions taken by the potential employer for the sole purpose of complying with a specific, applicable federal, state, tribal, or local law or regulation are not indicative of control. However, actions taken by the potential employer that go beyond compliance with a specific, applicable federal, state, tribal, or local law or regulation and instead serve the potential employer’s own compliance methods, safety, quality control, or contractual or customer service standards may be indicative of control. More facts that show control by the potential employer indicate employee status; more facts that show control by the worker indicate independent contractor status for this factor.
Examples: Nature and Degree of Control
- Example 1: A registered nurse provides nursing care for Alpha House, a nursing home. The nursing home sets the work schedule with input from staff regarding their preferences and determines the staff assignments. Alpha House's policies prohibit nurses from working for other nursing homes while employed with Alpha House to protect its residents. In addition, the nursing staff are supervised by regular check-ins with managers, but nurses generally perform their work without direct supervision. While nurses at Alpha House work without close supervision and can express preferences for their schedule, Alpha House maintains control over when and where a nurse can work and whether a nurse can work for another nursing home. These facts indicate employee status under the control factor.
- Example 2: Another registered nurse provides specialty movement therapy to residents at Beta House. The nurse maintains a website and was contacted by Beta House to assist its residents. The nurse provides the movement therapy for residents on a schedule agreed upon between the nurse and the resident, without direction or supervision from Beta House, and sets the price for services on the website. In addition, the nurse provides therapy sessions to residents at Beta House as well as other nursing homes in the community at the same time. These facts—that the nurse markets their specialized services to obtain work for multiple clients, is not supervised by Beta House, sets their own prices, and has the flexibility to select a work schedule—indicate independent contractor status under the control factor.
Factor Five: Extent to Which the Work Performed is an Integral Part of the Potential Employer's Business
Is the work performed an integral part of the potential employer's business?
- If the work performed by a worker is critical, necessary, or central to the potential employer's principal business, then this factor indicates that the worker is an employee.
- If the work performed by a worker is not critical, necessary, or central to the potential employer's principal business, then this factor indicates that the worker is an independent contractor.
This factor does not depend on whether any individual worker is an integral part of the business, but rather whether the function they perform is an integral part of the business.
Examples: Extent to Which the Work Performed is an Integral Part of the Potential Employer’s Business
- Example 1: A large farm grows tomatoes that it sells to distributors. The farm pays workers to pick the tomatoes during the harvest season. Because a necessary part of a tomato farm is picking the tomatoes, the tomato pickers are integral to the company's business. These facts indicate employee status under the integral factor.
- Example 2: Alternatively, the same farm pays an accountant to provide non-payroll accounting support, including filing its annual tax return. This accounting support is not critical, necessary, or central to the principal business of the farm (farming tomatoes), thus the accountant’s work is not integral to the business. Therefore, these facts indicate independent contractor status under the integral factor.
Factor Six: Skill and Initiative
Does the worker use specialized skills to perform the work and do those skills contribute to business-like initiative?
- This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work.
- Where the worker brings specialized skills to the work relationship, this fact is not itself indicative of independent contractor status because both employees and independent contractors may be skilled workers. It is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.
Examples: Skills and Initiative
- Example 1: A highly skilled welder provides welding services for a construction firm. The welder does not make any independent decisions at the job site beyond what it takes to do the work assigned. The welder does not determine the sequence of work, order additional materials, think about bidding for the next job, or use their welding skills to obtain additional jobs, and is told what work to perform and where to do it. In this scenario, the welder, although highly skilled technically, is not using those skills in a manner that evidences business-like initiative. These facts indicate employee status under the skill and initiative factor.
- Example 2: A highly skilled welder provides a specialty welding service, such as custom aluminum welding, for a variety of area construction companies. The welder uses these skills for marketing purposes, to generate new business, and to obtain work from multiple companies. The welder is not only technically skilled, but also uses and markets those skills in a manner that evidences business-like initiative. These facts indicate independent contractor status under the skill and initiative factor.
Additional factors that answer the question of whether a worker is economically dependent on an employer may be relevant. Factors that do not help answer this question, such as whether an individual has alternate sources of wealth or income, are not relevant.
Can an employee waive their rights under the FLSA by signing an independent contractor agreement?
No. Under the FLSA, a worker is an employee and not an independent contractor if they are, as matter of economic reality, economically dependent on the employer for work—regardless of whether they sign an independent contractor agreement. While businesses are certainly able to organize their businesses as they prefer consistent with applicable laws, and workers are free to choose which work opportunities are most suitable for them, if a worker is an employee under the FLSA, then FLSA-protected rights (such as minimum wage and overtime pay) cannot be waived by the worker. The Supreme Court has explained that permitting employees to waive their FLSA rights would undermine the Act’s goal of eliminating unfair methods of competition in commerce.
Can an individual be an employee for FLSA purposes even if they are an independent contractor for tax purposes?
Yes. The Internal Revenue Service (IRS) applies its own test (a version of the common law control test) to analyze if a worker is an employee or independent contractor for tax purposes. While the Department of Labor considers many of the same factors as the IRS, the economic reality test for FLSA purposes is based on a specific definition of “employ” in the FLSA, which provides that employers “employ” workers if they “suffer or permit” them to work. Courts have interpreted this language to be broader than the common law control test. This means that some workers who may be classified as independent contractors for tax purposes may be employees for FLSA purposes because, as a matter of economic reality, they are economically dependent on an employer for work.
If an individual is an employee, are they entitled to minimum wage and/or overtime pay?
Yes, unless an exemption applies. The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, the FLSA includes numerous exemptions to the Act’s minimum wage and/or overtime pay requirements. For example, section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, or professional employees, as well as computer employees and outside sales employees. For this FLSA exemption to apply, an employee’s specific job duties and earnings must meet all the requirements of the Department’s regulations. For more information on the FLSA’s white-collar exemptions, see Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act (FLSA).
What is an employer’s liability for misclassifying an employee as an independent contractor?
If an employee is incorrectly classified as an independent contractor, the employer will be responsible for paying any unpaid wages owed to the employee under the FLSA. Additionally, the employer may have to pay liquidated damages in an amount equal to back wages, as well as civil money penalties. Employers may also have to pay attorneys’ fees associated with litigation.
- Final Rule
- Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA)
- Frequently Asked Questions
- Compliance Assistance
For questions about this final rule, you may call the Wage and Hour Division’s (WHD) Division of Regulations, Legislation, and Interpretation at (202) 693-0406. For questions about the employment classification of a particular worker or group of workers, please contact your nearest WHD District Office, as found at https://www.dol.gov/agencies/whd/contact/local-offices.