Insights & Resources

January 19, 2024 | Alerts

The Department of Labor Issues Final Rule for Independent Contractor Classification

The Department of Labor Issues Final Rule for Independent Contractor Classification

Highlights

  • The U.S. Department of Labor published a final rule on how to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act.
  • The final rule will go into effect on March 11, 2024.
  • The final rule is part of the U.S. Department of Labor’s continuing effort to address perceived improper classification of employees as independent contractors.
  • The final rule implements a six-factor test for classification that closely tracks existing judicial authority requiring a “totality of the circumstances” analysis of the “economic realities.”

The Rule

On January 10, 2024, the United States Department of Labor (DOL) published a long-awaited final rule addressing when employers should classify workers as independent contractors or employees under the Fair Labor Standards Act (FLSA).  The final rule goes into effect on March 11, 2024.  The DOL commented that:

The misclassification of employees as independent contractors may deny workers minimum wage, overtime pay, and other protections. This final rule will reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.

The intent of the final rule is to ensure that an employer’s classification of their workers does not conflict with the protections under the FLSA, namely proper minimum wage payments and overtime entitlements.

The DOL’s final rule rescinds a 2021 rule in which two core factors – control over the work and opportunity for profit or loss – carried greater weight.  Under the final rule, a six-factor test for worker classification is considered.  This six-factor test requires a “totality of the circumstances” analysis of the “economic realities,” which is in line with existing judicial authority.  This means that each factor considered in determining a worker’s classification is weighed equally on a case-by-case basis.

The final rule applies when determining independent contractor classification under the FLSA.  Employers should also be mindful that the IRS, as well as state and local regulatory agencies, may apply their own guidance and tests for worker classification, including state wage and hour law, employment discrimination laws, worker’s compensation, unemployment benefits, and tax issues.

The Six-Factor Test

The six-factor test requires analysis on a case-by-case basis.  In analyzing the totality of the circumstances, courts may also take into account other factors if deemed relevant to the economic dependence of the worker on the employer.  Accordingly, it is important to treat each case on an individual basis.

  1. The worker’s opportunity for profit and loss.

“This factor considers whether the worker has 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.”  Thus, in considering this factor, the DOL would look to whether the worker can set or negotiate their own rate of pay; the worker’s ability to accept or decline work; whether the worker can profit or stand to lose money by working other jobs/gigs; whether the worker pays out-of-pocket to advertise their services; and whether the worker has control over purchasing materials, equipment, or space for work.  If a worker does not typically do these things, it is more likely the DOL would deem them to be an employee, and not an independent contractor. Conversely, if the worker’s opportunity for profit and loss depends on decisions they make independent of the employer, it is more likely that the DOL would deem that individual to be an independent contractor.

  1. Investment of capital by worker compared to investment by potential employer.

This factor considers the level of investment the worker makes towards the project/scope of work in comparison to what the employer contributes.  If, for example, a worker contributes or invests very little to the project, this fact would favor the worker being classified as an employee.  If, however, the worker’s investments support an independent business line for that worker, then that fact would favor the worker being classified as an independent contractor.

  1. The degree of permanence of the work relationship.

A continuous, indefinite, or exclusive relationship with a business would generally indicate an employee-employer relationship.  Independent contractors, on the other hand, tend to have more discreet, finite roles with an employer on an individual project basis.

  1. The nature and degree of the potential employer’s control over the work.

The more an employer exerts control and oversight over a worker makes it more likely the DOL would deem them to be an employee.  Independent contractors, however, tend to have more freedom with respect to scheduling, structure, and guidance on a particular project or assignment.  Facts to consider when analyzing this factor include whether the employer has the ability to schedule, discipline, and supervise the worker, as well as to impose restrictions on the worker for other jobs post-engagement.

Control within legal requirements for safety, quality, and customer/patient standards may not necessarily dictate an employer-employee relationship.  However, the DOL has stated that when these standards are imposed beyond legal requirements it trends towards an employee classification.  For example, if Occupational Safety and Health Administration (OSHA) requires minimum training to provide services at your facility, that is not a control factor indicating an employment relationship.  If, however, a business requires additional, enhanced training to do it “their” way, this may indicate the subjected worker is an employee.

  1. The extent to which the work is “integral” to the potential employer’s business.

The final rule highlights that independent contractors are workers who, as a matter of economic reality, are in business for themselves.  The DOL views a worker who performs a service that is integral to the employer’s business as an employee.  The DOL’s guidance and judicial case law look to what is critical, necessary, or central to the employer’s business when determining if the work is integral.

For example, if a medical practice hires a painter to paint its office, the act of painting is not “integral” to the practice of medicine.

  1. The worker’s skill or initiative.

If the worker requires basic training or is not applying any specialized skill to perform their job, it is more likely that the DOL would consider them to be an employee.  If, however, the worker possesses specialized skills, training, and licenses that they gained independent of the employer, it is likely that the DOL would view that worker as an independent contractor.

Impact of the Final Rule

The DOL’s final rule is likely to result in more workers being classified as employees as opposed to independent contractors.  This is true for workers who prefer to be classified as independent contractors.   Thus, more workers will likely be eligible for both minimum wage and overtime protections, as well as other benefits such as health coverage, retirement benefits, and job-protected leave.  Accordingly, understanding these changes and impact that the final rule may have on your business is critical for compliance with the FLSA, as well as other federal, state and local laws.   Businesses that improperly classify their workers can face prohibitive costs due to governmental investigations, litigation, taxation issues, back pay, as well as other fines and penalties.

Garfunkel Wild will continue to monitor and report on developments with respect to the final rule and will post updates on our website.  We anticipate the final rule being challenged.  We are also planning a webinar exploring this important topic further as part of our employment law series.

Should you have any questions regarding the above, please contact the authors, the Garfunkel Wild attorney with whom you regularly work, or contact us at [email protected].