The DOL’s Independent Contractor Final Rule

The DOL’s Independent Contractor Final Rule

March 26, 2024,

By Katya Lancero and Greg Gillis

     In late 2022, we published an article about the U.S. Department of Labor’s (“DOL”) Proposed Rule that would modify the January 2021 DOL independent contractor rule published during the final days of the former President Trump’s administration setting forth the test to determine whether a worker is an employee or independent contractor under the federal Fair Labor Standards Act (“FLSA”).  

     On January 10, 2024, the DOL published its Final Rule, and on March 11, 2024, the Final Rule went into effect, rescinding the previous 2021 DOL rule.  Although it is not binding law, the Final Rule is interpretive guidance which courts will rely upon in interpreting the FLSA.  Notably, the Final Rule is more employee-friendly and makes it easier for a court to conclude that a worker is an employee and not an independent contractor under the FLSA.

     This rule is important because employers subject to the FLSA are required to provide certain work protections to only those workers classified as employees, and not independent contractors under the FLSA, such as federal minimum wage and overtime compensation for non-exempt employees.  In addition, only employees are entitled to sue their employers for retaliation claims for complaining about FLSA violations and employers are only obligated to comply with FLSA recordkeeping requirements for employees.

     While the January 2021 DOL independent contractor rule identified five factors and placed heavier weight on two “core factors” related to the degree of the company’s control over the work and the worker’s opportunity for profit or loss, the Final Rule rule considers six factors and no longer places more weight on some factors over others.  Instead, factors are considered as part of a totality of the circumstances in evaluating whether the worker is economically dependent on the employer for work, or in business for his or herself.  This test is also known as the “economic reality” test. 

     Here is a summary of the six factors set forth in the Final Rule to consider in evaluating whether a worker is an employee or independent contractor under the FLSA:

1. Whether the worker experiences opportunities for profit or loss based on managerial skill. The following questions can be relevant in analyzing this profit or loss factor: Can the worker meaningfully negotiate the amount of pay he or she will receive in exchange for the work performed?  Can the worker choose to reject a job?  Can the worker choose the order and/or time in which the job is performed?  Does the worker engage in his or her own marketing and advertising to secure more work?  Does the worker make the decision to hire others, purchase materials and equipment, and/or rent space?  All of these questions create opportunities for profit or loss.  If they are answered “yes,” then this factor weighs in favor of the worker being classified as an independent contractor.
2. Whether the worker makes capital and/or entrepreneurial investments. Investments that are capital or entrepreneurial in nature support an independent business and serve a business-like function.  If the worker makes capital and entrepreneurial investments, it is more likely the worker is an independent contractor. Investments that are capital or entrepreneurial in nature are those that increase the worker’s ability to do different types of work or do more work, they reduce costs, and they extend market reach.  Furthermore, if the worker is making investments that are similar to those made by the potential employer, even if smaller in scale, this indicates the worker is operating independently, and thus an independent contractor.
3. The degree of permanence of the work relationship.  Employee/employer relationships are marked by a work relationship that is indefinite in duration, continuous, and/or exclusive of work for other employers.  On the other hand, independent contractor relationships are generally definite in duration, nonexclusive, project-based, and sporadic given that the worker is marketing his or her services to multiple entities.
4. The nature and degree of control by the company over the work. Facts to consider in evaluating this prong include: Does the company set the worker’s schedule?  Does the company supervise the performance of the work?  Does the company limit the worker’s ability to work for others?  Does the company use technological means to supervise the performance of the work?  Does the company reserve the right to supervise or discipline the worker?  Does the company place demands on the worker that prevent the worker from working for others or do not allow the worker to determine when they choose to work?  Does the company control prices or rates for services performed?  Does the company control marketing of the services or products provided by the worker?  If the answer is “yes” to these questions, the factor weighs in favor of the worker being classified as an employee.
5. Whether the work performed is an integral part of the company’s business. If the function performed by the worker is critical, necessary, or central to the company’s business, the factor weighs in favor of the worker being an employee.
6. Whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work, or where the worker is dependent on training from the company to perform the work.  If the worker uses specialized skills in connection with a business-like initiative, the worker is more likely to be an independent contractor.

     Lastly, additional factors may also be relevant to this analysis. 

     Critiques and Legal Challenges

     Opponents of the Final Rule are concerned as it will increase labor costs for companies that are required to re-classify their workers as employees, and it fails to take into account business models in the gig economy structured to rely on the independent contractor status.

     The Final Rule is being challenged by a coalition of business groups in a lawsuit pending in the U.S. District Court for the Eastern District of Texas, and it is also the subject of a lawsuit brought by freelancers in the U.S. District Court for the Northern District of Georgia who are challenging the rule as unconstitutional and in violation of the Administrative Procedure Act.  House Republicans have likewise proposed legislation that would block the Final Rule.

     Until those legal challenges prevail, now is the time for companies to promptly evaluate whether their workers are properly classified as independent contractors, as opposed to employees, under the Final Rule.  Please call Katya Lancero, Shar Bahmani, or Greg Gillis of Sacks Tierney P.A. if you would like assistance in making this determination.