The DOL Announces “Economic Realities” Test to Determine Employee Status

The Department of Labor (DOL) Wage and Hour Division issued final regulations, effective March 11, 2024. These rules established an economic realities test which will serve as a practical guide for employers in determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (“FLSA”). [29 CFR part 795].

How Does This Impact Employers?

The economic realities test helps determine if an employment relationship exists. Misclassifying a worker can lead to significant consequences including issues with taxes, workers’ compensation, unemployment compensation, employee benefits, and ERISA.

The 6 Factors: Economic Realities Test

As of March 11, 2024 the economic realities test will look at the following 6 factors.  If a worker is economically dependent on the employer, they are an employee. If they are in business for themselves, they are an independent contractor. The following facts and circumstances are required to be considered in making the foregoing assessments, with the totality of the circumstances being determinative.

Opportunity for profit or loss depending on managerial skill

Considers whether a worker can earn profits or suffer losses through their own independent effort and decision making. [29 CFR part 795.110(b)(1)]

• Does the worker negotiate their pay?
• Do they decide to accept or decline work?
• Do they hire their own workers and purchase materials and equipment?
• Do they engage in efforts to expand their business?

Investments by the worker and the employer

Examines whether the worker makes investments that are capital or entrepreneurial in nature. [29 CFR part 795.110(b)(2)]

• Investments by a worker that support the growth of a business, including by increasing the number of clients, reducing costs, extending market reach, or increasing sales, weigh in favor of independent contractor status.
• A lack of such capital or entrepreneurial investments weighs in favor of employee status.

Permanence of the work relationship

Considers the nature and length of the work relationship. [29 CFR part 795.110(b)(3)]

• Sporadic or project-based work with a fixed ending date (or regularly occurring fixed periods of work), where the worker may make a business decision to take on multiple different jobs indicates independent contractor status.
• When the work is continuous, does not have a fixed ending date, or may be the worker’s only work relationship suggests employee status.

Nature and degree of control

Considers factors that demonstrate the potential employer’s level of control of the worker’s performance of services and the economic aspects of the relationship. [29 CFR part 795.110(b)(4)]

Factors include hiring and firing, scheduling, prices or pay rates, supervision, and whether the worker can work for others.

Whether the work performed is integral to the employer’s business

Examines whether the work is critical, necessary, or central to the potential employer’s principal business. [29 CFR part 795.110(b)(5)]

• Work that is critical to the business indicates employee status.
• Non-critical work, necessary, or central to the employer’s principal business weighs in favor of independent contractor status.

Skill and initiative

Considers whether the worker uses their own specialized skills together with business planning and effort to perform the work and support or grow a business. [29 CFR part 795.110(b)(6)]

• The absence of specialized skills (for example, the worker relies on the employer to provide training for the job) indicates that the worker is an employee.
• If a worker uses their skills in connection with business initiative (to grow a business) would indicate independent contractor.

Employer Actions

• Audit existing independent contractor classifications.
• Consider classifying workers as employees if they don’t meet the test’s criteria.
• Consult legal counsel to discuss next steps.

A worker’s status as an employee versus an independent contractor under the new FLSA guidance is a purely functional test.  Neither the assignment of a label by an employer, the existence of a worker’s employment or independent contractor agreement, nor the manner in which a worker is paid is determinative of a worker’s status. Instead, a careful analysis must be performed. For additional resources reference the DOL Fact Sheet.

For more information, please contact compliance@6degreeshealth.com.