U.S. Department of Labor Issues Final Independent Contractor Rule

New Classification Requirements Go Into Effect March 11, 2024

namm policy words in front of u.s. capitol building at sunset

On January 10, 2024, the U.S. Department of Labor (DOL) issued the final independent contractor rule, which provides guidance to assess how workers should be classified under the Fair Labor Standards Act (FLSA). The FLSA sets standards for minimum wage, overtime pay, recordkeeping, youth employment standards and other requirements that apply to employees in the private sector.

This final rule takes effect on March 11, 2024 and rescinds the 2021 independent contractor rule from the prior Administration. The DOL stated that the newly issued guidance in the rule aligns with longstanding judicial precedent on which employers have previously relied to determine a worker’s status as either an employee or independent contractor. 

In a news release on its website, the DOL stated:

“The new independent contractor rule restores the multifactor analysis used by courts for decades, ensuring that all relevant factors are analyzed to determine whether a worker is an employee or an independent contractor.” In addition, DOL wrote that the “new rule will preserve essential worker rights and provide consistency for entities covered by the Fair Labor Standards Act.”

The final rule applies an “economic reality test” comprised of multiple factors as guides to conduct the totality-of-the-circumstances analysis to determine economic dependence. The final rule provides for the consideration of six economic reality factors:

  1. opportunity for profit or loss depending on managerial skill;
  2. investments by the worker and the employer;  
  3. the degree of permanence of the work relationship;
  4. the nature and degree of control an employer has over the person’s work;
  5. the extent to which the work performed is an integral part of the employer’s business; and
  6. the worker’s skill and initiative.

The DOL indicated, however, that one factor by itself, is not conclusive; the DOL also noted that other factors may be considered if relevant to the overall question of economic independence.

Next Steps

Beginning March 11, 2024, employers should carefully consider the six factors and related guidance in the final rule using a “totality of the circumstances” assessment to classify their workers. Since the 2021 rule has been rescinded, its two “core factors” (control and opportunity for profit or loss) are no longer conclusive.  Employers should analyze and apply final rule factors to current workers, since an independent contractor could now be reclassified as an employee.

Because the final rule essentially narrows the universe of independent contractors, this could impact music retailers’ use of teachers and instrument repair personnel.  In addition, depending on the circumstances, certain “gig workers” in the music industry could be affected.  

Businesses and individuals working as independent contractors should seek legal advice or assistance from a human resources professional to ensure compliance under the final rule. 

Possible Legal Challenge

A possible legal challenge to the final rule is under consideration by organizations representing small businesses. NAMM will keep you posted on these legal developments as well as the final rule’s implementation.

Resources

See below for links to DOL’s website for background on the final rule, including information for small businesses, a Q & A and classification guidance documents.