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DOL UNVEILS NEW FINAL RULE FOR CLASSIFICATION OF INDEPENDENT CONTRACTORS

January 23, 2024 in Firm News, News by Gabby Sully

On March 11, 2024, a new version of the U.S. Department of Labor’s (“DOL”) Rule regarding when employers can classify workers as independent contractors under the Fair Labor Standards Act (“FLSA”) will take effect (the “New Rule”).  The New Rule, titled “Employee or Independent Contractor Classification Under the Fair Labor Standards Act,” establishes a six-factor test for determining whether someone is an employee or independent contractor. This rule will rescind the Independent Contractor Status Under the Fair Labor Standards Act rule (the “2021 Rule”) from January 7, 2021.

I. The 2021 Rule
Federal courts throughout the country have relied on the economic reality test in determining whether a worker is an independent contractor or employee under the FLSA.  Prior to the creation of the New Rule, the DOL published the 2021 Rule  which designated two of the five economic reality test factors as “core factors.”  These two factors included the nature and degree of control over the work, and the worker’s opportunity for profit or loss.  The other three factors, which were considered less probative, included the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the employer, and whether the work is part of an integrated unit of production.

II. The New Rule
The New Rule, unlike the 2021 Rule, does not have “core factors,” but it restores the multifactor analysis used by the courts, with no factor being given greater weight. According to the DOL, the New Rule is “[c]onsistent with a totality-of-the-circumstances analysis, no one factor or subset of factors is necessarily dispositive, and the weight to give each factor may depend on the facts and circumstances of the particular relationship.”

The New Rule’s factors are as follows:

    1. Opportunity for profit or loss depending on managerial skill. The DOL suggests the following may be relevant considerations for this factor: “whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.”
    2. Investments by the worker and the potential employer. The DOL suggests that for this factor, the focus “should be on comparing the investments to determine whether the worker is making similar types of investments as the potential employer . . . to suggest that the worker is operating independently, which would indicate independent contractor status.”
    3. Degree of permanence of the work relationship. The DOL suggests that this factor weighs in favor of status as an employee when “the work relationship is indefinite in duration, continuous, or exclusive of work for other employers.” In contrast, the DOL suggests that this factor weighs in favor of status as independent contractor when “the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities.”
    4. Nature and degree of control.  The DOL suggests that this factor considers the employer’s control over a worker’s performance as well as the economic aspects of the working relationship, and that facts to be considered include “whether the potential employer sets the worker’s schedule, supervises the performance of the work, [] explicitly limits the worker’s ability to work for others,” “whether the potential employer uses technological means to supervise the performance of the work . . ., reserves the right to supervise or discipline workers, or places demands or restrictions on workers that do not allow them to work for others or work when they choose,” and facts regarding an employer’s control over the economic aspects of the working relationship, such as “control over prices or rates for services and the marketing of the services or products provided by the worker.
    5. The extent to which the work is “integral” to the potential employer’s business. The DOL suggests that this factor weighs in favor of a worker’s status as an employee when “the work they perform is critical, necessary, or central to the potential employer’s principal business.”
    6. The worker’s skill or initiative. The DOL suggests that this factor weighs in favor of status as an employee when “the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work.” The DOL emphasized, however, that just because a worker brings specialized skills to a working relationship, is not “itself indicative of independent contractor status.”

 

Notwithstanding these factors, the DOL provided that “[a]dditional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.”

III. What Comes Next
The DOL’s New Rule is not binding on courts, but it may be relied upon by federal courts as guidance in determining whether a worker is an independent contractor or an employee under the FLSA. It is also possible that courts look to the New Rule as guidance for assessing a worker’s status under other federal laws, like the Family and Medical Leave Act (“FMLA”), that use the economic reality test.  Therefore, the New Rule may result in increased litigation regarding the classification of workers on the federal level.

Employers should consider reviewing their company policies and practices to determine how the New Rule might affect their classifications of their workers.   In doing so, however, it is important for employers to take into consideration their state laws on this subject, because some states’ tests are more restrictive than the federal economic reality test.  For example, for New Jersey employers, the “ABC” test set forth by the Supreme Court in Hargrove v. Sleepy’s LLC remains in effect.  Accordingly, employers should contact their labor and employment counsel to discuss how each test may affect their business practices.