Remember the 2021 Independent Contractor Rule? Well, forget it or at least most of it. Last week, the DOL published a new final rule for independent contractor status under the Fair Labor Standards Act (the New Rule). The New Rule rescinds the 2021 rule and provides guidance on how to analyze whether an individual should be classified as an employee or independent contractor for DOL purposes.
Why the New Rule?
The New Rule is the DOL’s attempt to align with judicial guidance on independent contractor status and provide clarification to business owners attempting to figure out classification. While there are a few similarities between the 2021 rule and New Rule (for example both identify economic dependence as an important piece of the puzzle), the New Rule differs in several ways. Specifically, the New Rule reinstated the multi-factor economic realities test used prior to the old 2021 rule, weighs all factors equally, adds a sixth factor, and provides additional facts for consideration. Another reason could be that the 2021 rule was the Trump Administration’s rule while the New Rule comes from the Biden DOL.
What do you need to know about the New Rule?
It goes into effect March 11, 2024.
The New Rule applies under the Fair Labor Standards Act (FLSA), not other laws such as the Internal Revenue Code or the National Labor Relations Act. State and local laws may also have their own standard or analysis.
Workers and employers may not sidestep the New Rule by agreeing to independent contractor status or by attempting to waive employee status.
The New Rule applies a totality-of-the-circumstances economic reality test that weighs six factors. Those six factors, none of which are dispositive, include:
1. Opportunity for profit or loss depending on managerial skill
The first factor poses a lot of questions: can the worker meaningfully negotiate the charge or pay for the work, decline the job or choose when to perform the job, engage in personal marketing activities to expand his or her business, and hire other individuals, purchase his or her own materials and equipment, and rent space. If there is no opportunity for a worker to make or lose profit, then the worker is likely an employee.
2. Investments by the worker and the potential employer
For this factor, the New Rule requires you to consider the costs to a worker for tools and equipment, labor, costs imposed by the potential employer onto the worker, and the worker’s investments. The focus is on comparing the worker’s and potential employer’s investments.
3. Degree of permanence of the work relationship
If the relationship is indefinite, this factor leans toward employee status. On the other hand, if there is a definite duration or if the relationship is defined by a project, the factor weighs in favor of independent contractor status. This factor gets a little tricky when looking at seasonal or temporary work as such work does not necessarily indicate independent contractor status.
4. Nature and degree of control
For this factor, consider who sets the worker’s schedule, supervises performance of the work, controls prices, and whether there is an explicit limit to the worker’s ability to work for others.
5. Extent to which the work performed is an integral part of the potential employer’s business
This factor focuses on the worker’s function and whether he or she is performing work that is an integral part of the potential employer’s business, not whether the individual is integral. If the worker’s function is critical or necessary to the potential employer’s business, the factor leans toward employee status.
6. Skill and initiative
This factor looks at the use of a specialized skill set for the work. The specialized skill alone is not indicative of independent contractor status, as both employees and independent contractors may have specialized skills. Rather, if the worker uses those skills in connection with the “business-like initiative,” the factor suggests independent contractor status. The DOL provides an example of a highly skilled welder who provides a specialty welding service and markets his skills to generate new business. In that case, the New Rule indicates that the facts indicate independent contractor status under this factor.
In addition to the above, other “additional factors” may be relevant to the analysis. For example, if any fact suggests that the worker is in business for him or herself, that fact may be used in the analysis. Not all of the factors must be met, and no single factor is dispositive.
Remember, the New Rule is an effort by the DOL to align with judicial precedent and reduce risk that employees are misclassified. As always, we will monitor how the New Rule plays out and whether the DOL’s goals are met. Reach out to your employment lawyers with any questions or if you need help walking through the New Rule’s guidance.