DOL Issues New Rule on Independent Contractor Classification
The Department of Labor (“DOL”) has published its new, final rule on the standards for distinguishing between employee and independent contractor status under the Fair Labor Standards Act (“FLSA”). On March 11, 2024, this rule will rescind the existing independent contractor rule (issued by the DOL in 2021), and in many ways, the “new rule” is reminiscent of familiar standards, because it reiterates that “economic dependence” is the key inquiry when distinguishing between employees and independent contractors under the FLSA. The rule also sets forth a familiar six-factor test.
Background on the DOL’s Application of the FLSA to Employees and Independent Contractors.
The FLSA requires that all covered, non-exempt employees receive a guaranteed minimum wage for all hours worked, and overtime pay for all hours worked in excess of 40 in a seven-day measuring period. If a worker is classified as an independent contractor, then that worker is not considered an “employee” under the FLSA, and therefore is not afforded the FLSA’s minimum wage and overtime protections.
Historically, the DOL and courts have applied an “economic reality test” to determine whether a worker is an employee or an independent contractor under the FLSA. This economic reality test examined whether, as a matter of economic reality, the worker in question was economically dependent on the employer for work. If yes, then the worker would be classified as an employee. In its assessment of economic dependence, courts examined a host of factors, including the worker’s opportunity for profit or loss, investment, permanency, control, skill, etc. No single factor or factors were considered as having predetermined weight.
In 2021, under the Trump administration, the DOL released a new rule: Independent Contractor Status Under the Fair Labor Standards Act (the “2021 IC Rule”). The 2021 IC Rule departed from precedent in its weighing of economic reality factors, directing that the nature and degree of control over the work and the worker's opportunity for profit or loss were most probative factors in the analysis of worker status. The 2021 IC Rule also identified three additional “non-core” factors:
(1) The amount of skill required for the work;
(2) The degree of permanence of the working relationship between the worker and the potential employer, and
(3) Whether the work was part of an integrated unit of production (however, the 2021 IC Rule stated that it was “highly unlikely” that this third non-core factor could outweigh the combined probative value of the first two non-core factors).
The DOL has now rescinded the 2021 IC Rule because (according to the DOL), its “significant departure” from precedent resulted in greater confusion amongst employers in applying the analysis, and could potentially lead to the misclassification of certain workers as independent workers. Additionally, the DOL has released a final rule on assessing the status of workers.
The 2024 Final Rule.
In the 2024 Final Rule, which will be effective on March 11, 2024, the DOL returns the employee/independent contractor analysis to the well-recognized six economic reality factors test that federal courts have historically applied. The DOL has stated that the factors do not have a predetermined weight, and that no single factor is dispositive. Further, it reiterates that “economic dependence is the ultimate inquiry, meaning that a worker is an independent contractor as opposed to an employee under the Act if the worker is, as a matter of economic reality, in business for themself.”
The 2024 Final Rule sets out these as the relevant factors to consider:
Opportunity for profit or loss depending on managerial skill. Does the worker have 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?
As examples:
Does the worker determine or meaningfully negotiate the charge or pay for the work provided?
Does the worker accept or decline jobs or choose the order and/or time in which the jobs are performed?
Does the worker engage in marketing, advertising, or other efforts to expand their business or secure more work?
Does the worker make decisions to hire others, purchase materials and equipment, and/or rent space?
If a worker has no opportunity (or risk) for profit or loss, then they should likely be classified as an employee.
2. Investments by the worker vs. the potential employer. This factor considers whether any investments by a worker are capital or entrepreneurial in nature. Investments that are capital or entrepreneurial in nature will indicate independent contractor status.
Factors to consider in determining capital and/or entrepreneurial investments include:
Investments that increase the worker's ability to do different types of or more work, reducing costs, or extending market reach.
Costs to a worker of tools and equipment to perform a specific job, or other costs that the potential employer imposes unilaterally on the worker are not evidence of capital or entrepreneurial investment and will likely indicate employee status.
The worker's investments do not need to be equal to the potential employer's investments and should not be compared in terms of the dollar values of investments.
3. Degree of permanence of the work relationship. This factor weighs in favor of employee status when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers. A worker is more likely to be an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic.
4. Nature and degree of control. This factor considers the potential employer's control over the performance of the work and the economic aspects of the working relationship – and more control means a higher likelihood of employee status. Relevant facts may include:
Whether the potential employer sets the worker's schedule.
Whether the potential employer supervises the performance of the work or explicitly limits the worker's ability to work for others.
The worker’s control over prices or rates for services.
The marketing of the services or products provided by the worker.
Actions taken by the potential employer for the sole purpose of complying with jurisdiction-specific laws or regulations are not indicative of control. However, actions that go beyond compliance, and instead serve the potential employer's own compliance methods or contractual standards may be indicative of control. More indicia of control by the potential employer will favor employee status.
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 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.
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. Specialized skills, however, are not themselves indicative of independent contractor status-- both employees and independent contractors may be skilled workers. Instead, the DOL emphasizes that 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.
Additional factors may also 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 themselves, as opposed to being economically dependent on the potential employer for work.
With this Final Rule, the DOL is joining many other interested state and federal agencies focused on scrutinizing the misclassification of workers as independent contractors (and capturing lost tax and penalty revenues). If you have a sense that workers in your organization may be misclassified, now is the time to review those relationships and ensure proper classification.
Contact us if you need help.