On January 9, 2024, the Department of Labor (“DOL”) promulgated a final rule to define the test for independent contractor status under federal wage and hour law. The rule rescinds the 2021 Trump administration employer-friendly rule, marking the latest swing of the political pendulum. The DOL received over 55,000 comments from workers, employers, unions, and trade organizations after its October 11, 2022 notice of proposed rulemaking. The final rule addresses many of these comments but is largely similar in substance to the October 2022 proposed rule. The final rule’s new test makes it more likely that an independent contractor is deemed an employee, subjecting the employer to the FLSA’s minimum wage, overtime, and recordkeeping requirements.
Under the Fair Labor Standards Act (“FLSA”), workers generally are classified as employees or independent contractors. The final rule expressly does not apply when evaluating FLSA coverage of other kinds of workers, such as unpaid interns, students, trainees or volunteers. The final rule will take effect on March 11, 2024.
The final rule ditches the streamlined Trump administration rule—where workers were classified as independent contractors if they owned their own business or had the ability to work for competing companies—and instead returns to a multifactor test that asks whether workers are economically dependent on the employer for work or if they are truly in business for themselves. To answer this question, the final rule imposes a six factor “totality of the circumstances” test. The six factors that courts (and employers) must consider when making a classification are:
- the opportunity for profit or loss depending on managerial skill;
- investments by the worker and the employer;
- degree of permanence of the work relationship;
- nature and degree of control;
- extent to which the work performed is an integral part of the employer’s business; and
- skill and initiative.
The final rule opts for a more circumstantial and ambiguous test, allowing courts to consider factors in addition to those listed above, and expressly rejects requests for further guidance on weighing the factors.
The final rule also gives instructions on how to apply each factor. Most notable is the DOL’s detailed instruction regarding the control factor. The final rule defines specific facts as being “relevant” to the employer’s control over its relationship with a worker, including an employer’s reserved but unexercised rights (e.g., a contract provision requiring a worker to wear a safety helmet at a worksite that is never used by the employer). Similarly, the final rule makes electronic supervision of independent contractors for the purpose of supervising the work a consideration that weighs against a finding of independent contractor status under the control factor. Although merely collecting data generated from the actions of a worker, such as whether an item was delivered, is not necessarily evidence of control.
The DOL heeded employer comments on one major issue, walking back its proposal to consider legal compliance requirements in assessing the control factor. The final rule expressly states that such requirements are not indicative of control. But the DOL clarifies that this does not include efforts that “go beyond” legal compliance but instead “serve the potential employer’s own compliance methods, safety, quality control, or contractual or customer service standards.” These efforts can be considered under the control factor. The DOL also refused requests for more industry-specific guidance on applying the test.
One change from the proposed rule clarifies the issue around opportunity for profit and loss. Rather than evaluating whether the worker actually took advantage of such an opportunity, the final rule simply evaluates whether the worker had the ability to decide whether take or decline an opportunity for profit and loss. The final rule also adds language such as “initiative or business acumen or judgment” as a hallmark of independent contractor status.
The final rule also considers the worker’s capital or entrepreneurial investment compared to the potential employer’s investment in the business, and whether the worker makes similar types of investments including investments in tools and equipment beyond performance of a particular job. Such an analysis includes whether the investment would permit the performance of more types of work, the reduction of costs, or the extension of market reach, and thus could be evidence of independent contractor status.
The new rule also reframes the question of whether the work performed is “an integral part of the employer’s business” to mean work that is “critical, necessary, or central” to the company’s principal business. Rather than examining whether any particular worker is “integral” to the business, the factor now examines whether the business function the worker performs is integral or important to the business. The final rule also fails to provide guidance on how to determine what the employer’s “principal business” is or what is “critical, necessary, or central to it.” Although case law is controlling on the question, courts may find the pro-employee final rule to be persuasive authority in classification cases. Thus, employers who relied on the Trump administration rule should review policies and procedures for classifying workers to determine if any changes can and should be made.
