DOL Independent Contractor Final Rule
By: Danielle Smid
On January 9, 2024, the Department of Labor (DOL) released its Final Rule which changes the criteria for classifying independent contractors under the Fair Labor Standards Act (FLSA). The Final Rule is set to take effect on March 11, 2024, and rescinds the 2021 independent contractor rule, replacing it with an analysis that the DOL explains, is consistent with current case law.
Workers that are classified as employees are protected by the FLSA whereas, those workers classified as independent contractors are not covered by the law. The FLSA guarantees a minimum wage, overtime pay for hours worked over 40 hours a week, and other benefits. In contrast, independent contractors are not guaranteed those protections, however they have more control over what work will be done and how it will be done and are considered self-employed. The application of the FLSA provides major protections for the employee and obligations for the employer and therefore, determining the classification of the worker is essential.
The Final Rule emphasizes its purpose for protecting employees who are misclassified as independent contractors. The Final Rule moves from the “core factors” test set forth in the 2021 rule and returns to the “totality of the circumstances” test to determine whether a worker should be classified as an employee or independent contractor. The DOL emphasizes the Final Rule was not enacted to disrupt the industry of independent contractors. Instead, the motivating reason behind this Final Rule is to protect misclassified employees, entitling them to the protections under the FLSA, and to eliminate the deprivation of basic rights and support. However, many business groups are worried this rule will only create more confusion in classifying workers. It is argued that as compared to the 2021 rule, the Final Rule favors classifying workers as employees. Therefore, there is potential for businesses to see a shift and increase in classifying workers as employees and having to now comply with the FLSA. The DOL is trying to solidify the framework to accurately classify this important distinction between employee and independent contractor moving forward.
Under the Final Rule, independent contractors will now be evaluated based on the totality of the circumstances analysis that assesses economic dependence between the employer and the worker that includes six factors. The factors include:
- The degree to which the employer controls how the work is done.
- The worker’s opportunity for profit or loss.
- The amount of skill and initiative required for the work.
- The degree of permanence of the working relationship.
- The worker’s investment in equipment or materials required for the task.
- The extent to which the service rendered is an integral part of the employer’s business.
The Final Rule makes it clear that these factors are not exhaustive and no one factor is determinative, allowing for a flexible approach when applying the FLSA, according to the DOL. This is a departure from the 2021 core factors test, as the previous rule identified two controlling factors: 1) control over the work and 2) opportunity for profit or loss. These factors were thought to be the most probative and predetermining of the status of a worker. The 2021 rule also listed three less probative non-core factors including: 1) the skill required for the work, 2) the degree of permanence of the working relationship, and 3) whether the work is part of an integrated unit of production. Additionally, under the 2021 rule the facts to be considered in the analysis were narrowed, possibly precluding essential facts resulting in misapplication of the test. The Final Rule attempts to broaden considerations as to the economic reality of the relationship for a more accurate categorization. Ultimately, the Final Rule explains that the main analysis hinges on the economic reality and an inquiry into the economic dependence of a worker on its employer.
In reworking the Final Rule, the DOL is attempting to create a more flexible framework that is consistent with the analysis courts and the DOL have historically conducted looking at the totality of the circumstances in assessing economic dependence. The Final Rule is intended to be applied broadly across all types of employers and industries. The Final Rule reinforces the outlook of pro-employee categorization to promote the protections of workers, as well as provide more consistent guidance to employers and workers on identifying the correct classification. Therefore, companies that rely on independent contractors should evaluate whether their classification meets this new standard. The DOL wrote this rule with a multitude of factors to consider, in order to have the ability to enforce workers’ rights on a case-by-case basis.
We will continue to follow developments and guidance on this Final Rule. Please reach out to me or your BrownWinick employment attorney if you have any questions or concerns about the classification of workers. Special thanks to law clerk Emily Bell for her assistance with this blog.