The Employer’s Wage and Hour Advisor

DOL Returns to the Economic Reality Test  

The 2024 Rule made it significantly more difficult to classify workers as independent contractors. It applied a six-factor “totality of the circumstances” analysis to determine whether a worker was economically dependent on the employer, and therefore, an employee—not an independent contractor. This framework created uncertainty and complexity for employers, making independent contractor classification a challenging task.

Now, the DOL has confirmed that, pending further rulemaking, it will rely upon the Fair Labor Standards Act’s (FLSA) longstanding “economic reality” test. In particular, it will follow guidance set forth in its Fact Sheet 13, issued in July 2008, and its 2019 Opinion Letter. The economic reality test is widely viewed as more employer-friendly than the 2024 Rule. It uses the following factors to assess whether a worker is an employee under the FLSA or an independent contractor operating their own business:

1. Opportunity for profit or loss depending on managerial skill,
2. Investments by the worker and the employer,
3. Permanence of the work relationship,
4. Nature and degree of control,
5. Whether the work performed is integral to the employer’s business, and
6. Skill and initiative.

Key Takeaways for Employers

Through this action, the DOL is offering greater flexibility to employers at the federal level—particularly those operating in industries relying heavily on independent contractor arrangement. It is important to note, however, that the 2024 Rule remains formally in effect for purposes of private litigation. Courts may still apply the Rule’s framework in deciding worker classification disputes, and its withdrawal from DOL enforcement does not preempt more stringent classification standards imposed by state laws. For instance, some states, including California, Massachusetts and New Jersey, already apply the stricter “ABC test,” that make independent contractor classification more difficult to sustain. Employers should consult legal counsel with questions about applicable state laws.

Conclusion 

Given the range of interpretations and the complexities surrounding independent contractor classification, employers should conduct a thorough analysis of each worker’s independent contractor status. When there is uncertainty about state or federal regulations, employers should seek guidance from experienced legal counsel, as classification decisions are highly fact-specific and can vary based on individual circumstances. Honigman will continue to monitor and report any further notable updates.