United States Department of Labor Releases New Rule for Independent Contractor Classification

On January 9, 2024, the United States Department of Labor (“DOL”) released a final rule (the “Final Rule”) setting forth new standards for determining whether an individual may be classified as an independent contractor under the Fair Labor Standards Act (“FLSA”).  The Final Rule, effective March 11, 2024, raises the bar for employers seeking to classify workers as independent contractors. Indeed, the Final Rule returns to the long-used “totality of the circumstances” standard, but will likely lead to more findings of an employment relationship (versus an independent contractor relationship) than under that previous standard.     

Also, the Final Rule is markedly different than the Trump Administration’s worker classification analysis, which was adopted in January 2021 (the “2021 Rule”) and generally considered more business-friendly as it made it easier to classify workers as independent contractors. In effectuating the Final Rule, the DOL rescinded the 2021 Rule. According to the DOL, even if the Final Rule is invalidated or enjoined, the recission of the 2021 Rule stands on its own, so that prior rule is no longer in effect.

Economic Realities Test

The construction of the Trump Administration’s 2021 Rule emphasized workers’ control over their work and risk of profit or loss over other factors. While these factors are still included under the Final Rule, unlike with the 2021 Rule, they are not given outsized consideration when conducting the worker classification analysis. Indeed, the Final Rule reflects the DOL’s position that the economic reality of the relationship between the worker and employer should be evaluated based on the “totality of the circumstances”. The new “economic realities test”, which is similar to prior DOL precedent, considers the following six factors, which shall be applied equally with no factor receiving more weight over other factors:

1. the worker’s opportunity for profit or loss based on managerial skill;
2. investments by the worker and potential employer;
3. the degree of permanence of the work relationship;
4. the nature and degree of the employer’s control over the work;
5. the extent to which the work is “integral” to the employer’s business; and
6. the worker’s skill or initiative.

These factors are non-exhaustive – meaning that other factors might be relevant depending on the circumstances of the particular case. The Final Rule does not specify which additional factors could be considered, so courts and government agencies could have significant leeway in determining what else should be taken into account when adjudicating independent contractor status.

Takeaway

The Final Rule will likely make it more difficult for employers to classify certain workers as independent contractors. Employers should review their worker classifications based on the new test to mitigate against exposure to employment law claims and tax penalties associated with worker misclassification. Notably, DOL guidance will not necessarily override federal and state court decisions, which create precedent over administrative agencies. That being said, litigants are expected to rely on the Final Rule as persuasive authority for courts deciding classification issues.

Employers should also stay up-to-date with any further changes as the Final Rule will likely face legal challenge. Indeed, business groups have signaled they will seek to invalidate the Final Rule given it is more employee-friendly and various Republican legislators have indicated they will seek the repeal of the Final Rule under the Congressional Review Act.