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Employee or Independent Contractor? The Department of Labor’s Final Rule

March 18, 2024 (15 min read)


The U.S. Department of Labor (DOL) has published its Final Rule for determining employee or independent contractor status under the Fair Labor Standards Act (FLSA).1

The final rude, which went into effect on March 11, 2024, rescinds the independent contractor rule issued during the Trump Administration and replaces it with a standard markedly similar to that adopted by the courts in the pre-Trump era. This article examines the Final Rule, contrasting it with its predecessor, and underscores the enforcement challenges facing it.


The FLSA generally requires that all covered non-exempt employees must be paid at least the federal minimum wage and overtime compensation for hours worked in excess of 40 in a workweek.2 The FLSA also establishes child labor and recordkeeping requirements3 and prohibits retaliation against employees who are discharged or discriminated against for asserting rights under the Act.4 A threshold issue to determine FLSA coverage is whether the hired party is an employee or independent contractor, since only employees are entitled to the FLSA’s protections.5

The FLSA does not establish a test for determining employment status. While the Act does define employee and employer, neither definition is particularly helpful as to whether an employment relationship exists. Specifically, the FLSA defines an employee as “any individual employed by an employer”6 and employ as “to suffer or permit to work.”7 Similarly, employer is statutorily defined as including “any person acting directly or indirectly in the interest of an employer in relation to an employee.”8 Given the circuitous nature of these definitions and the FLSA’s failure to define the contours of the employment relationship itself, the task of defining that relationship has fallen on the courts. Generally, the relationship has been judicially defined as a matter of “economic reality”—whether, based on the totality of the relationship, “the worker is economically dependent on the employer to work (thus, an employee) or is in a business for themselves (and is thus an independent contractor).”9

In assessing economic dependence, both the DOL and the courts have historically applied a multi-factor totality of circumstances test, in which no one factor is dispositive.10 The factors—which somewhat vary among the circuits—generally include the opportunity for profit and loss, investment, permanency, control, whether the work is an integral part of the hiring party’s business, and skill and initiative.11

In January 2021, the DOL—for the first time—adopted a formal rule to provide guidance on the classification of independent contractors in any industry under the FLSA. The rule was entitled “Independent Contractor Status Under the Fair Labor Standards Act” (commonly designated as 2021 IC Rule).12 It marked a significant departure in emphasis from the economic reality test which the courts and the DOL previously adopted. Although—like the traditional economic reality test—the 2021 IC Rule identified five factors to guide the inquiry in determining whether a worker was an independent contractor or employee,13 the 2021 IC Rule gave greater weight to two of the five factors. These two “core factors” that were deemed most probative included (1) the nature and degree of control that the hiring party asserted over the worker and (2) the worker’s opportunity for profit and loss.14 Under the 2021 IC Rule, if these two core factors pointed toward the same classification, “there was a substantial likelihood that it was the worker’s accurate classification.”15 The remaining “lesser” or “non-core” factors included the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the putative employer, and whether the work is part of an integrated unit of production.16 The 2021 IC Rule further provided that it was “highly unlikely” that these non-core factors could outweigh the combined probative value of the core factors.17

The Final Rule rescinds the 2021 IC Rule and replaces it with an analysis for determining employee or independent contractor status that is more consistent with the FLSA as interpreted by longstanding judicial precedent.18 The Final Rule was designed to reduce the risk that employees are misclassified as independent contractors while providing
a consistent approach for businesses that engage with individuals who are in business for themselves.19

Both the DOL and commentators have posited that the 2021 IC Rule’s emphasis on the core factors of control and opportunity for profits and loss negated consideration of the non-core factors as well as U.S. Supreme Court precedent emphasizing that employment status under the economic reality test turns upon “the circumstances of the whole activity” in the relationship at issue rather than on “isolated factors.”20 Following such precedent, federal appellate courts have repeatedly cautioned against a mechanical or formulaic application of the economic reality test,21 and specifically warned that no single factor is controlling and the list of factors is not exhaustive.22 Contrary to the core-factor emphasis of the 2021 IC Rule, the Final Rule reverts to a multi-factor totality of circumstances test that does not ascribe weight to any factor.

Highlights of the Final Rule

According to the Final Rule, “economic dependence is the ultimate inquiry for determining whether a worker is an independent contractor or an employee.”23 The amount the worker earns, how the worker is classified, and whether the worker has other sources of income are not determinative of economic dependence.

The Final Rule specifically identifies and describes the following factors as relevant to the economic reality standard:

1. Opportunity for profit or loss depending on managerial skill. This factor considers whether the worker has opportunities for profit or loss based on managerial skill (including initiative or business acumen or judgment) that affect the worker’s economic success or failure in performing the work. The following facts, among others, can be relevant: 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.24

2. Investments by the worker and the potential employer. This factor considers whether any investments by a worker are capital or entrepreneurial in nature. Costs to a worker of tools and equipment to perform a specific job, costs of workers’ labor, and costs that the potential employer imposes unilaterally on the worker, for example, are not evidence of capital or entrepreneurial investment and indicate employee status. Investments that are capital or entrepreneurial in nature and thus 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 need not be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of investments or the sizes of the worker and the potential employer. Instead, the focus should be on comparing the investments to determine whether the worker is making similar types of investments as the potential employer (even if on a smaller scale) to suggest that the worker is operating independently, which would indicate independent contractor status.25

3. Degree of permanence of the work relationship. This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers. This factor weighs in favor of the worker being an independent contractor when the work relationship is definite 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 entities. 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 a lack of permanence is due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ, this factor is not necessarily indicative of independent contractor status unless the worker is exercising their own independent business initiative.26

4. Nature and degree of control. This factor considers the potential employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship. 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, or explicitly limits the worker’s ability to work for others. Additionally, facts relevant to the potential employer’s control over the worker include whether the potential employer 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 places demands or restrictions on workers that do not allow them to work for others or work when they choose. Whether the potential employer controls economic aspects of the working relationship should also be considered, including control over 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. 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 indicia of control by the potential employer favors employee status; more indicia of control by the worker favors independent contractor status.27

5. Extent to which the work performed is an integral part of the potential employer’s business. This factor considers whether the work performed is an integral
part of the potential employer’s business. This factor does not depend on whether any individual worker in particular is an integral part of the business, but rather whether the function they perform is an integral part of the business. This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the potential employer’s principal business. This factor weighs in favor of the worker being an independent contractor when the work they perform is not critical, necessary, or central to the potential employer’s principal business.28

6. Skill and initiative. This factor considers whether the worker uses specialized skills to perform the work and whether 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.29

7. Additional factors. Additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.30 

Notably, in its commentary to the Final Rule, the DOL expressly stated that it was not adopting the ABC Test adopted in California and in a few other states.31 The ABC test is more likely to find workers are employees and makes it much harder to use independent contractors.

Enforcement Challenges and Implications of the Final Rule

The impact of the Final Rule is dependent on several factors. Most courts have already framed their own versions of the economic reality test and they are unlikely to deviate from established precedent merely because the DOL issued the Final Rule. Whether the Rule will be entitled to deference is certain to be impacted by a case that the Supreme Court is scheduled to decide. In that anticipated decision involving the cases of Relentless, Inc. v. Dep’t of Commerce32 and Loper Bright Enterprises v. Raimondo,33 the Court is reconsidering the Chevron doctrine, under which courts grant considerable deference to certain agency regulations.34 If Chevron is abandoned or extremely limited, courts will enjoy more latitude in deciding whether to follow the Final Rule and the DOL’s authority to enforce the Final Rule would be severely limited. 

This article was originally published in Bender’s Labor and Employment Bulletin, 24-2 Bender’s Labor & Employment Bulletin 02 (2024).

Laurie E. Leader, formerly a clinical professor at Chicago-Kent College of Law, is a practicing attorney, author, certified mediator, and principal of Effective Employment Mediation, LLC - Chicago, Northfield & Libertyville Offices ( She has authored numerous articles and book chapters and two treatises, and is editor-in-chief of Bender’s Labor and Employment Bulletin. Laurie earned an A.B. degree from Washington University in St. Louis and her J.D. degree from Cleveland State University.

Related Content

For a discussion of the impact of the Final Rule, see


For an overview of current guidance on independent contractors, see


For an analysis of issues surrounding misclassification of workers, see


For a survey of key legal developments in the labor and employment area, see


For a description of three tests used to determine whether a worker is an employee or an independent contractor, see


For specific guidance to help companies maintain independent contractor status, see


1. See 89 Fed. Reg, 1638 (Jan. 10, 2024); see also U.S. Department of Labor, Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act, RIN 1235-AA43. The Final Rule is codified in a new part 795 to title 29 of the Code of Federal Regulations with cross-references in 29 C.F.R. §§ 780.330(b) and 788.16(a). The FLSA is codified at 29 U.S.C.S. § 201 et seq. 2. See generally 29 U.S.C.S. §206(a) (minimum wages); 29 U.S.C.S. § 207 (overtime compensation). The FLSA is not preemptive on state and local wage-hour laws. The law that governs is that which is most protective of the employee; federal law does not preempt state and local wage and hour laws that afford greater protection for the employee. See generally 29 U.S.C.S. § 218(a) (allowing states to set greater minimum wage, maximum hour and child labor protections than the FLSA provides); Ellis v. Edward D. Jones & Co., 527 F. Supp. 2d 439, 450 (W.D. Pa. 2007) (noting Congress’s intent to “leave undisturbed ‘the traditional exercise of the states’ police powers with respect to wages and hours more generous than the federal standards’” (emphasis omitted) (quoting Lehman v. Legg Mason, Inc., 532 F. Supp. 2d 726, 731 (M.D. Pa. 2007)); Morrow v. Green Tree Servicing, L.L.C., 360 F. Supp. 2d 1246, 1252 (M.D. Ala. 2005) (recognizing that “the FLSA does not preempt state law contract provisions that are more generous than the FLSA demands” (quoting Freeman v. City of Mobile, 146 F.3d 1292, 1298 (11th Cir. 1998)). Stated differently, assuming that an employer is subject to federal, state, and local minimums and that the employee is not exempt from minimum wage requirements, the highest minimum wage rate applies. In the majority of states, state statutes, and ordinances set higher minimum rates than the federal minimum of $7.25 per hour. Recent state and local law changes to minimum wage rates have been highlighted in Bender’s Labor and Employment Bulletin. 3. 29 U.S.C.S. §§212 (child labor) and 211(c) (recordkeeping requirements). 4. 29 U.S.C.S. §215(a)(3). 5. Rutherford Food Corp. v. McComb, 331 U.S. 722, 729 (1947). 6. 29 U.S.C.S. § 203(e)(1). 7. 29 U.S.C.S. § 203(d). 8. 29 U.S.C.S. § 203(g). The “suffer or permit” language has been held to mean that the FLSA’s scope of employment is broader than the common law standard that is based on agency principles. See Nationwide Mut. Ins. v. Darden, 503 U.S. 318, 326 (1992). 9. 89 Fed. Reg, at 1641 and n. 28. See generally Community for Creative Non-Violence v. Reid, 490 U.S. 730, 751 (1989). 10. 89 Fed. Reg, at 1642-43; Rutherford, 331 U.S. at 729; United States v. Silk, 331 U.S. 704, 713 (1947). 11. 89 Fed. Reg, at 1642, citing to various judicial iterations of the economic reality test in ns. 51-53. 12. 86 Fed. Reg. 1168 (Jan. 7, 2021). The effective date of the 2021 IC Rule was March 8, 2021. The 2021 IC Rule was never codified in the Code of Federal Regulations, because the DOL delayed and then withdrew the 2021 IC Rule before its effective date. A district court later vacated the DOL’s actions to delay and withdraw the 2021 IC Rule and, as a result, the DOL enforced the 2021 IC Rule in accordance with that decision. See id. at n.3; see also Coalition for Workforce Innovation v. Walsh, 2022 U.S. Dist. LEXIS 68401, at *49 (E.D. Tex. Mar. 14, 2022) (holding the 2021 IC Rule enforceable as of its effective date). 13. 86 Fed. Reg. at 1246-47. 14. 86 Fed. Reg. at 1246. 15. 86 Fed. Reg. at 1246. 16. 86 Fed. Reg. at 1247. 17. 86 Fed. Reg. at 1246. 18. See generally Final Rule, 89 Fed. Reg, at 1639, 1642-43. 19. 89 Fed. Reg, at 1640. 20. Rutherford, 331 U.S. at 730. 21. 331 U.S. at 727. 22. 89 Fed. Reg, at 1642-43 and the cases cited in ns .51-53. 23. 89 Fed. Reg, at 1639-40, 1663-64. 24. 29 C.F.R. § 795.110(b)(1) (verbatim). 25. 29 C.F.R. § 795.110(b)(2) (verbatim). 26. 29 C.F.R. § 795.110(b)(3) (verbatim). 27. 29 C.F.R. § 795.110(b)(4) (verbatim). 28. 29 C.F.R. § 795.110(b)(5) (verbatim). 29. 29 C.F.R. § 795.110(b)(6) (verbatim). 30. 29 C.F.R. § 795.110(b)(7) (verbatim). 31. 89 Fed. Reg, at 1662-63. The ABC Test was first adopted by the California Supreme Court in Dynamex Operations W. v. Super. Ct., 416 P.3d 1 (2018). Differing versions of the ABC test have been incorporated into state statutes (e.g., New Jersey Wage Payment Law, N.J. Stat. Ann. § 34:11-4.1 et seq., but, more often than not, courts have rejected application of the ABC test in wage-hour misclassification cases. 32. 62 F.4th 621 (1st Cir. 2023), cert. granted in pt. sub nom., 144 S. Ct. 325 (2023). 33. 45 F.4th 359 (D.C. Cir. 2022), cert. granted in pt. sub nom., 143 S. Ct. 2429 (2023). 34. See Chevron USA, Inc. v. NRDC, Inc., 467 U.S. 837, 842-44 (1984).