On January 10, 2024, the US Department of Labor (DOL) published its long-awaited final rule on independent contractor classification under the Fair Labor Standards Act (FLSA).
Background
Independent contractor classification has been a hot topic for years, particularly with the rise of the “gig worker” – an individual engaged in temporary or freelance work, and therefore outside of the typical employer-employee relationship.
According to Upwork’s Freelance Forward report, in 2022, 39% of the American workforce did some sort of freelance work—up three percentage points from 2021.
Considering this developing economic reality, the Trump administration DOL issued a rule in 2021 which sought to streamline independent contractor classification. The 2021 DOL rule highlighted two “core factors” employers should look to when determining independent contractor status:
- The nature and degree of the worker’s control over the work
- The worker’s opportunity for profit or loss
The 2021 DOL rule provided that if these two factors indicated the same classification result, then there was a substantial likelihood that such classification was correct.
Conversely, the prior Obama-era rule outlined six factors employers must look to when determining independent contractor status. The new independent contractor rule from the Biden administration DOL effectively overturns the 2021 Trump administration DOL rule, and reinstates the Obama-era rule.
But, at the heart of the classification inquiry under both rules is whether, as a matter of economic reality, a worker is economically dependent upon the business to which it renders service.
What is the new independent contractor rule?
The new independent contractor rule features six factors which guide the determination of whether a worker is an independent contractor (in business for himself) or is economically dependent upon the employer for work and therefore an employee under FLSA.
Again, the new independent contractor rule is effectively reinstating worker classification guidance as understood prior to the 2021 Trump administration DOL rule.
The new independent contractor rule is effective March 11, 2024.
What are the six factors to determine independent contractor status?
The “Economic Realities” test under the new independent contractor rule features six factors for employers to use in determining worker status. The six factors are:
- Worker opportunity for profit or loss depending on managerial skill
- Worker and potential employer investments
- Degree of permanence of the working relationship
- Nature and degree of control of employer over work
- Extent to which the work is performed is integral to the employer’s business
- Use of the skill and initiative of the worker
The new independent contractor rule also provides additional analysis of the “control” factor (number four) including detailed discussions of how scheduling, supervision, price-setting, and the ability to work for others should be considered.
Backlash to new independent contractor rule (ABC test, potential legal action)
Employers in states like California, Massachusetts, and New Jersey are likely familiar with the
“ABC” test for determining independent contractors. This requires that all three factors of a three-factor test be met in order for a worker to be classified as an independent contractor.
Per the FAQs released by the DOL, the Final Rule does not adopt an “ABC” test. Nonetheless, with its goal of minimizing worker misclassification, there is concern that the analysis under the Final Rule may lean towards finding an employment relationship under the FLSA, and therefore may have significant impact on companies in their use of independent contractors.
Indeed, House of Representatives Small Business Committee Chair, Rep. Roger Williams, sent a letter to Acting Secretary of Labor Julie Su last week lambasting the new rule as “threaten[ing] the livelihood of many small-business owners by reimplementing a confusing multifactor analysis to determine whether a worker is an [independent contractor] or an employee … as a result, businesses are less likely to hire gig workers with a fear of increased misclassification lawsuits.”
According to Inc. Magazine Policy Correspondent Melissa Angell, various business groups like the Coalition for Workforce Innovation, Associated Builders and Contractors, and the US Chamber of Commerce are also seeking action to block the rule.
How should employers prepare for the new independent contractor rule?
Employers should note that the rule only revises the DOL’s interpretation under the FLSA, and has no effect on other laws—federal, state, or local—that use different standards for employee classification.
In preparation for this new independent contractor rule that takes effect March 11, 2024, employers should consider taking the following steps:
- For further details, employers should consult the Department of Labor, Wage and Hour Division website which includes several resources for employers including: Final Rule; FAQs; A Guide for Small Entity Compliance, which includes examples of each of the six factors and common questions; Press Release on January 9, 2024 announcing the Final Rule; and Notice of Proposed Rulemaking published on October 13, 2022 issued prior to the final rule.
- Employers should carefully evaluate their current use of independent contractors in light of the multifactor analysis required by the Final Rule, and should audit their current service providers to ensure proper classification.
- As a result of such audit, employers may be required to update independent contractor agreements (though a written agreement alone is not dispositive of status) and internal policy and practices regarding independent contractors.
- Employers should closely monitor any legal challenges to the rule which are expected.