Legal Blogs and Updates

On January 9, 2024, the United States Department of Labor (USDOL) released its final rule amending the existing criteria used to differentiate between independent contractors and employees under the federal Fair Labor Standards Act (FLSA). The rule will become effective on March 11, 2024.

The final rule outlines six non-exhaustive economic reality factors that must be considered when determining if a worker is an employee or independent contractor. No single factor is prioritized, and employers must consider all factors in totality:

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 over the work.
5. Extent to which the work performed is an integral part of the potential employer’s business.
6. Skill and initiative.

With respect to the above factors, the USDOL clarifies the following within the final rule:

• Opportunity for Profit or Loss Depending on Managerial Skill: It is important to consider the worker's ability to negotiate pay, accept or decline jobs, schedule tasks, engage in business efforts, and make decisions like hiring others. If a worker lacks the opportunity for profit or loss, especially when paid a fixed rate, it suggests employee status.
• Investments by the Worker and the Employer: Costs imposed by the employer, such as tools and equipment, are not indicative of independent contractor status. The focus is on qualitative, relative investments, examining whether the worker's investments align with the potential employer's overall business. The worker's investments need not match the employer's in dollar value or size, but rather in type, indicating independent contractor status.
• Degree of Permanence of the Work Relationship: This factor favors employee status when the work relationship is indefinite, continuous, or exclusive, and independent contractor status when the relationship is definite, non-exclusive, project-based, or sporadic. Lack of permanence due to unique operational characteristics is not indicative of independent contractor status unless the worker exercises independent business initiative.
• Nature and Degree of Control: It is important to consider scheduling, supervision, technology use, and demands or restrictions on the worker. An employer’s mere compliance with legal requirements does not indicate employer control. But if an employer’s actions go beyond what is legally required, such actions may lend support toward employer control. More control by the potential employer favors employee status, while more control by the worker supports independent contractor status.
• Extent to Which the Work Performed is an Integral Part of the Employer’s Business: The work favors employee status if the work is critical, necessary, or central to the business.
• Skill and Initiative: Lack of specialized skills or dependence on employer training indicates employee status. Possession of specialized skills alone is not indicative of independent contractor status -- it is the use of those skills with business-like initiative that indicates independence.

It is important to note that while the final rule significantly impacts FLSA classifications under federal law, businesses in New Jersey must still determine a worker’s classification as an employee or independent contractor by analyzing and adhering to state law, and specifically the ABC Test.  As a reminder the ABC Test states:

[s]ervices performed by an individual for remuneration shall be deemed to be employment . . . unless and until it is shown to the satisfaction of the division that:

(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and

(B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and

(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.

In other words, despite the USDOL’s final rule under the FLSA, per New Jersey law, a worker is deemed to be an employee unless part A, B and C, above, can be satisfied.  For additional information about the ABC Test, please see our prior employer alert.  

Connell Foley provides New Jersey companies with guidance to understand and comply with worker classification laws.  Please contact us if you have any questions or concerns.