Are You an Independent Contractor?

Episode 347 – The U.S. Department of Labor’s constantly changing rules on classifying workers as either independent contractors or employees is creating confusion among employers. What’s the current status?

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On January 10, 2024, the U.S. Department of Labor (DOL) under President Biden published a final rule (2024 Rule) that revised the DOL’s previous guidance on classifying individual workers as independent contractors or employees under the Fair Labor Standards Act (FLSA). At that time, there was much debate and concern whether individuals, particularly gig economy workers such as those working for Uber and Lyft, were not receiving the protection of being classified as employees, including minimum wage, overtime pay, etc. Misclassification of employees as independent contractors carries significant liability and penalties under the FLSA including payment of owed wages and overtime pay, liquidated damages and attorneys’ fees and costs.

The former rule issued in 2021 (2021 Rule), which was specifically rescinded by the 2024 Rule, designated two core factors in determining whether an individual was an employee or independent contractor: control and opportunity for profit or loss. The 2021 Rule also did not consider whether the work performed was central or important to the potential employer’s business. Accordingly, the DOL under President Biden believed the 2021 Rule narrowed the “economic reality test” long used by the courts, by limiting the facts that may be considered as part of the test. “Under the final rule, the Department will instead rely on the long-standing multifactor “economic reality” test used by courts to determine whether a worker is an employee or independent contractor. This test relies on the “totality of the circumstances where no one factor is determinative.”[1]

The 2024 Rule appeared to make it harder for an individual to be classified as an independent contractor rather than an employee. The 2024 Rule applied six factors in the analysis:

(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.

On May 1, 2025, the DOL under President Trump, in a Field Assistance Bulletin, announced that it was then currently “reviewing and developing the appropriate standard for determining FLSA employee versus independent contractor status.”[2] The DOL stated that it will no longer apply the 2024 Rule’s analysis to independent contractor or employee status, although it did not specifically rescind the rule and advised that “the 2024 Rule remains in effect for purposes of private litigation and nothing in this FAB changes the rights of employees or responsibilities of employers under the FLSA”.[3] The Bulletin stated that it will now refer back to DOL guidance issued in a July 2008 Fact Sheet and the 2019 Opinion Letter FLSA2019-6.[4] This Fact Sheet states that the factors

considered significant are:

1) The extent to which the services rendered are an integral part of the principal’s business.

2) The permanency of the relationship.

3) The amount of the alleged contractor’s investment in facilities and equipment.

4) The nature and degree of control by the principal.

5) The alleged contractor’s opportunities for profit and loss.

6) The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.

7) The degree of independent business organization and operation.

The Fact Sheet further states:

There are certain factors which are immaterial in determining whether there is an employment relationship. Such facts as the place where work is performed, the absence of a formal employment agreement, or whether an alleged independent contractor is licensed by State/local government are not considered to have a bearing on determinations as to whether there is an employment relationship. Additionally, the Supreme Court has held that the time or mode of pay does not control the determination of employee status.[5]

As stated by legal commentator Johnathan Clark,: “The more traditional economic realities test looks at various factors to determine whether a worker is actually in business for themselves (and therefore a contractor) or dependent on the hiring entity (and thus an employee).[6]

This latest change in DOL guidance has created even more confusion. For the time being, employers and businesses need to remain vigilant and consult with their tax and legal advisors with respect to their individual needs for workers.

In addition, depending upon the state in which the business is formed or operated, careful attention must be given to state laws. For instance, several states including “California, New Jersey, and Massachusetts use the much stricter “ABC test” to determine whether a worker is an independent contractor. Under that test, employers must prove (1) a worker is free from the hiring entity’s control and direction, (2) the work is outside the hiring entity’s usual course of business, and (3) the worker is customarily engaged in an independently established trade, occupation, or business. Employers must prove all three elements to properly classify a worker as an independent contractor.”[7]

 

[1] U.S. Department of Labor. “Frequently Asked Questions – Final Rule: Employee or Independent Contractor Classification Under the FLSA.” Dol.gov https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking/faqs (accessed August 8, 2025).

[2] U.S. Department of Labor. “Field Assistance Bulletin No. 2025-1” https://www.dol.gov/sites/dolgov/files/WHD/fab/fab2025-1.pdf (accessed August 28, 2025)

[3] Id.

[4] U.S. Department of Labor Wage and Hour Division. “Fact Sheet #13: Employment Relationship Under the Fair Labor Standards Act (FLSA).” Dol.gov https://www.dol.gov/sites/dolgov/files/WHD/fact-sheets/whdfs13.pdf (accessed August 8, 2025).

[5] Id.

[6] Clark, Johnathan. “DOL Retracts Biden-Era Independent Contractor Classification Rule.” laboremploymentlawblog.com https://www.laboremploymentlawblog.com/2025/05/articles/department-of-labor/doj-retracts-biden-era-independent-contractor-classification-rule/ (accessed August 8, 2025).

[7] Id.

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