The Department of Labor (DOL) set the record straight on how to classify workers under the Fair Labor Standards Act. In March 2024, the agency released a guide to determine if workers are employees or independent contractors.
Six economic factors
According to the new DOL rule, it is important to analyze a worker’s economic dependence on their employer. As a guide, they need to consider these economic reality factors:
- Skills and initiatives: Employees and freelancers may have specialized skills. However, some employees don’t need specialized skills for their jobs. On the other hand, those who use their skills for business-like purposes tend to be freelancers.
- If their work is integral to the business: Workers with job functions that are critical to the business are most likely employees. Whereas those whose tasks are not central to the business are usually freelancers.
- Investments by workers and employers: Freelancers may invest in capital or business processes for the sake of their performance. Comparing their investment with their employer can help gauge if the worker is a freelancer.
- Opportunities for loss or profit based on managerial skills: Those who cannot negotiate their pay and be at the helm of their schedule are usually employees. Meanwhile, freelancers may accept or decline projects. They also decide on how to get things done most of the time.
- Nature and degree of control: If an employer has more control over the work relationship, the worker is an employee. Businesses could control their employees’ schedules, supervise their work and demand exclusivity.
- Degree of permanence of their working relationship: Employees usually have exclusive and indefinite work durations, while freelancers can take on various projects with fixed timelines. Independent contractors are commonly non-exclusive workers who may have seasonal gigs.
The DOL added that businesses must not agree with employees who want to appear as freelancers on their contracts. They must also reclassify freelancers appropriately because the law entitles employees to minimum wage, overtime pay and paid sick days, among others.
Protecting businesses and workers
There is no need to check all the boxes when determining an employee’s classification. Authorities can weigh these factors and decide based on the circumstances. The bottom line is that businesses and workers must comply to promote transparency, business consistency and labor protection.
