The U.S. Department of Labor has Finalized Its New Independent Contractor Rule: Here’s What It Means for Your Business

The U.S. Department of Labor (DOL) announced its Final Independent Contractor Rule Tuesday that defines whether a worker is considered an employee or independent contractor under the Fair Labor Standards Act (FLSA). The final regulation, as expected, makes it much less likely that employers will be able to classify workers as independent contractors rather than employees, affecting millions of gig workers such as drivers, construction workers, janitors, and healthcare workers.

The changes to the Final Rule will go into effect on March 11, 2024.

The Basics of the New Rule

The new Final Rule rescinds a Trump-era rule from 2021 that made it easier for employers to classify workers as independent contractors, making it one of the most expansive regulatory actions taken by the Biden Administration to date.

The Final Rule revives a multifactor “totality-of-the-circumstances” (or “economic realities”) framework for analyzing independent contractor status. Under this framework, the DOL will consider six non-exhaustive factors when examining the relationship between a worker and a potential employer.

Worker’s Opportunity for Profit or Loss

This factor considers “whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work.” If a worker has no opportunity for profit or loss other than working more hours, that worker is more likely an employee than an independent contractor. The following facts, among others, are germane to the analysis:

• 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; and
• 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.

In other words, if the worker can make decisions for themselves such as choosing the jobs they take on, determining the rate of pay for specific jobs, or making decisions regarding who they would hire to assist them in the completion of the job, it is more likely that they are properly classified as an independent contractor.

Investments Made by the Worker & the Employer

This considers “whether any investments by a worker are capital or entrepreneurial in nature.” According to the DOL, “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.”

Degree of Permanence of the Work Relationship

This factor looks at whether the “work relationship is indefinite in duration or continuous, which is often the case in exclusive working relationships.” This weighs in favor of independent contractor status “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.”

Nature & Degree of Control Over Performance of the Work

Previously considered a “core” factor, this factor looks at the employer’s control over the individual’s work and the economic aspects of their relationship, such as setting prices or rates for services. The DOL points out that “reserved control” by the hiring party, even if not exercised, weighs in favor of employee status. Relevant facts would include who sets the worker’s schedule, whether the employer supervises the worker’s performance (including through “technological supervision”), whether the employer actually limits the worker’s ability to work elsewhere, and whether the employer reserves the right to discipline them.

According to the DOL, control exerted “for the sole purpose of complying” with a “specific applicable” law is not relevant to the control analysis. But here’s the rub: actions that “go beyond compliance” may be indicative of employee status if these actions “instead serve the potential employer’s own compliance methods, safety, quality control, or contractual or customer service standards.” The problem here is immediately apparent: businesses routinely have health and safety programs that go beyond the minimum legal requirements. Requiring contractors to comply with these health and safety requirements could be treated by the DOL as evidence of employee status.

Extent to Which the Work Performed is an Integral Part of the Employer’s Business

This factor does not consider whether the individual themself is integral to the business; rather, it considers whether the function they provide to the employer is an integral part of the business. The more integral the work is, the more likely it is that the individual is an employee as opposed to an independent contractor. In reality, however, few businesses choose to hire someone to perform services that are not in some way “integral” to their business.

Use of the Worker’s Skill & Initiative

The last factor considers the level of specialized skill required by the job and whether those skills “contribute to a business-like initiative.” The less specialized skill required for the job, or alternatively, the more dependent a worker is on the employer to acquire those specialized skills, the more likely the individual will be considered an employee.

Because no one factor is particularly determinative, businesses will essentially be left to guess which factor(s) should be given the greatest weight. To make matters worse, the Final Rule also notes a seventh catch-all factor that it calls “additional factors,” but does not define what those other factors might be. In other words, if the DOL can’t prove an employment relationship exists by analyzing the above-described six factors, it can still look to other, as yet undefined factors, to support misclassification. Unquestionably, this creates uncertainty and confusion for employers.

What Does This Mean for Your Business?

Navigating the fine line between maintaining the independence of contractors and meeting the Final Rule’s requirements poses a challenge. While businesses will still be able to use independent contractors, the DOL’s rule redefining when someone is an employee or an independent contractor is clearly biased towards declaring most independent contractors as employees. It raises the bar so that more companies will now be out of compliance. Employers are encouraged to carefully review the Final Rule and consult with employment counsel to ensure their worker classification policies and practices comply with the FLSA. If a company is found to have misclassified a worker, that company will be subject to back pay and penalties under the FLSA, including but not limited to, minimum wage and overtime compensation violations.

It bears noting that the Final Rule only applies to the FLSA. It has no impact on any state wage and hour laws that do not follow the FLSA for determining whether a worker should be classified as an employee or independent contractor. For example, California, New Jersey, Massachusetts, and several other states apply an “ABC Test” (with some exceptions) under which a worker is considered an employee and not an independent contractor unless the hiring entity satisfies three conditions distinct from (but in some instances similar to) the factors in the final rule.

Business groups are widely expected to seek to block the rule in court, and the U.S. Chamber of Commerce, the largest U.S. business lobby, has already said it is considering a lawsuit.

Conclusion

For more information on the DOL’s Final Rule and what it means for your organization, please contact Jacqueline Voronov, Jeffrey Daitz, or any member of Hall Booth Smith’s Labor & Employment department. We are happy to work with you on evaluating your workforce to identify potential workers whose classification status may be affected by the Final Rule as well as offer strategic advice regarding how to ensure that workers remain properly classified under the FLSA and other federal and state laws.

Disclaimer

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