On January 10, 2024, the U.S. Department of Labor (the DOL) published its final independent contractor rule, which revises the Trump administration’s interpretation of what makes a worker an employee or an independent contractor under the Fair Labor Standards Act (the FLSA).
The final rule will go into effect on March 11, 2024, and signifies a return to the traditional, six-part “economic reality” analysis that has historically been utilized by many courts. Under this new rule, companies must look to the economic reality of the relationship to determine whether a worker should be classified as an employee or an independent contractor. According to the DOL: “[i]f the economic realities show that the worker is economically dependent on the employer for work, then the worker is an employee. If the economic realities show that the worker is in business for themselves, then the worker is an independent contractor.”
Questions and Answers
Question 1: What are the six factors that companies should consider in making a classification assessment?
There are six factors to be considered when assessing the economic reality of the relationship, with the outcome depending on the totality of the circumstances (e.g., none of the factors have a predetermined weight). These factors include:
1. Opportunity for profit or loss depending on managerial skill. This factor looks at whether the worker can earn profits and/or suffer losses based on 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 (e.g., they can’t negotiate their pay, they can’t accept/decline work, they can’t engage in marketing or advertising to secure more work, they can’t hire others or purchase equipment, etc.), they should be classified as an employee.
2. Relative investments by the worker and company. This factor examines whether the worker makes investments that are capital or entrepreneurial in nature. For example, if the worker makes investments that support an independent business or serve a business-like function, such as increasing the ability to do more work, reduce costs, or extend market reach, there is support for an independent contractor classification. On the other hand, costs to a worker of tools and equipment, costs of workers’ labor, and costs that a company imposes unilaterally on the worker are not evidence of capital or entrepreneurial investment.
3. Degree of permanence of the work relationship. This factor considers the nature and length of the relationship. Employees have work relationships that are indefinite in duration, continuous, or exclusive of work for other employers. Independent contractors have work relationships that are definite in duration, non-exclusive, project-based, or sporadic because the worker is in business for themself and marketing their services or labor to multiple entities.
4. Nature and degree of the company’s control. This factor looks at things like a company’s ability to control the performance of work and the economic aspects of the working relationship. For example, does the employer set the worker’s schedule, supervise the performance of work, reserve the right to discipline workers or place demands on workers, and/or explicitly limit the worker from working for others? More control by a company weighs in favor of employee status.
5. Extent to which the work performed is an “integral” part of the company’s business. This factor considers whether the work is “critical, necessary, or central” to a company’s primary business, which would suggest an employee status. The factor weighs in favor of a worker being an independent contractor if the work performed is not critical, necessary, or central to a company’s primary business.
6. Skill and initiative. Finally, this factor considers whether the worker uses both specialized skills to perform the work and whether those skills contribute to “business-like initiatives.” A worker bringing specialized skills to the relationship and using those skills in connection with business-like initiatives would suggest an independent contractor relationship.
Question 2: Does a worker have to satisfy all of the economic reality factors to qualify as an independent contractor?
No. According to the DOL, “[n]o single factor (or set of factors) determines a worker’s status as either an independent contractor or an employee.” Instead, companies should weigh all six factors together to assess whether a worker is economically dependent on an employer for work, considering the totality of the circumstances.
Question 3: Are there ever times when “additional factors” matter in determining a worker’s employment status?
The DOL has said that outside of the six-factor test discussed above, additional factors may be relevant in determining a worker’s status as an employee or independent contractor, if those factors in some way indicate that the worker is in business for themselves, as opposed to being economically dependent on the employer for work. It’s interesting to note that this guidance is identical to what was in the prior rule (the 2021 Independent Contractor Rule) and remains consistent with past case law and judicial precedent.
Question 4: Practically speaking, what is the anticipated impact of this final rule?
The practical result of the final rule is that for many workers, the six-factor test is likely to weigh in favor of employee status under the FLSA. Additionally, the new rule, along with a lack of any controlling factors, will likely increase the variability in determining workers’ status. In turn, we could see more litigation and potentially increased enforcement discretion for the DOL. It’s especially important for companies to understand the impact of the final rule because workers cannot voluntarily waive or self-select their status as an employee or independent contractor under the FLSA. In addition, note that we do not believe this new rule will impact industries in different ways. In other words, the DOL’s overarching goal is to combat worker misclassification and we anticipate seeing the impact of this rule hit all industries equally.
Further, companies should consider potential impacts and overlap with state laws. The DOL’s rule is intended to provide guidance as to how the DOL will interpret independent contractor classifications; however, it’s important to note that courts are not required to follow the rule and it does not impact state or local laws that may use different classification standards (most notably, California uses a more stringent test to determine independent contractor classifications).
Finally, it’s already anticipated that the new rule will face legal challenges. Republican members on the Senate Health, Education, Labor and Pensions Committee have indicated they will seek to repeal the final rule, and some business groups have also signaled that they will oppose the rule.
Question 5: What practical steps should companies take with respect to the final rule?
There are a couple of things that companies should consider doing in response to the final rule. As an initial matter, companies should conduct a full review of their current workforce, including working with legal counsel to review any independent contractor engagements and ensure compliance with the new rule. Additionally, companies should review any existing independent contractor agreements for revisions needed to bring the agreements in compliance with the new rule. Finally, companies should ensure they are keeping accurate and detailed records surrounding worker classifications, which, if needed, can be used to show compliance with the new rule.
If you would like to speak with an attorney about the new independent contractor classification rule, please reach out to a member of the Morris, Manning & Martin, LLP Employment Team.