New U.S. DOL Independent Contractor Rule goes into Effect
The United States Department of Labor (“DOL”) issued a Final Rule regarding the classification of workers as employees or independent contractors under the Fair Labor Standards Act (“FLSA” or the “Act”). The Final Rule went into effect on March 11, 2024. As employers are aware, the Act’s minimum wage and overtime protections only apply to employees, not independent contractors. The Final Rule rescinds the DOL’s 2021 Independent Contractor Rule and its use of two “core factors” to determine whether a worker is an employee or an independent contractor and reflects a return to the pre-2021 “totality-of-the-circumstances” analysis to determine if a worker is economically dependent on the employer.
The DOL’s 2021 Independent Contractor Rule
The DOL’s 2021 Independent Contractor Rule identified five factors to guide the inquiry into a worker's status as an employee or independent contractor. Two of the five factors—the nature and degree of control over the work and the worker's opportunity for profit or loss—were designated as “core factors” that were the most probative and carried greater weight in the analysis. The 2021 Rule stated that if these two core factors pointed towards the classification of a worker as an independent contractor, there was a substantial likelihood that it was the worker's accurate classification. The 2021 Rule also identified three less probative non-core factors: the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the potential employer, and whether the work is part of an integrated unit of production. The 2021 Rule stated that it was highly unlikely that these three non-core factors could outweigh the combined probative value of the two core factors.
The DOL’s New Independent Contractor Rule
Under the Final Rule, a worker who, as a matter of economic reality, is economically dependent on an employer for work is an employee and a worker who is in business for themselves is properly classified as an independent contractor. The Final Rule sets forth six “economic reality” factors to be analyzed in determining whether a worker is economically dependent on the employer: (1) the opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the potential employer; (3) the degree of permanence of the work relationship; (4) the nature and degree of control over the worker; (5) the extent to which the work performed is an integral part of the potential employer’s business; and (6) skill and initiative. The Final Rule makes clear that this is not an exhaustive list of factors to be considered, and states that additional factors may be relevant as well. In addition, no single factor is dispositive of the proper classification of a worker or given more weight than the others; the factors should be used to assess the totality of the circumstances of the relationship.
Opportunity for Profit or Loss Depending on Managerial Skill
The first factor under the Final Rule considers whether the worker has opportunities for profit or loss based on managerial skills (e.g., business acumen, judgment, or initiative) that affect the economic success of the worker or their failure in performing the work. The Final Rule explains that certain facts may be relevant to this factor, such as: whether the worker sets or can meaningfully negotiate their pay for the work; whether they accept or decline jobs or choose the order/time in which jobs are performed; whether they engage in marketing, advertising, or other efforts to expand their business or secure more work; and whether they make decisions to hire others, purchase materials or equipment, or rent space. However, the Final Rule specifies that decisions workers can make that affect the amount of pay they receive (e.g., a decision to work more hours or take more jobs when paid a fixed rate per hour or job) generally do not reflect the exercise of managerial skill indicating independent contractor status under this factor.
Investments by the Worker and the Employer
The second factor looks to whether any investments by a worker are capital or entrepreneurial in nature. Investments that are capital or entrepreneurial in nature (indicating independent contractor status) generally support an independent business and serve a business-like function, such as increasing their ability to do different types of work or more work; reducing cost; or extending the market reach of the business. To support a worker’s classification as an independent contractor, the worker’s investments do not have to be equal to the potential employer’s investments and should not be compared only in terms of dollar value; the focus is on comparing investments to determine whether the worker is making similar types of investments as the potential employer that suggest that the worker is operating independently.
Degree of Permanence of the Work Relationship
This factor will weigh in favor of finding an independent contractor relationship when the work relationship is of a limited duration, non-exclusive to the employer, project-based, or sporadic based on the worker being in business for themselves and marketing their services or labor to multiple entities. If the work relationship is indefinite in duration, continuous, or work is done exclusively for the employer, this factor will weigh in favor of finding that the worker is an employee. Importantly, regularly occurring fixed periods of work, such as for seasonal or temporary workers, although of a finite or limited duration, do not necessarily indicate independent contractor status by themselves. Rather, where a lack of permanence of the position is due to operational characteristics that are unique or intrinsic to a particular business or industry and the workers employed, this factor is not indicative of independent contractor status unless the worker is exercising their own independent business initiative.
Nature and Degree of Control
The fourth factor examines the potential employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship. More indicia of control favors employee classification; less indicia of control favors independent contractor classification. Facts relevant to control include the employer’s ability to set the worker’s schedule, supervision of the performance of work, or limiting the workers ability to perform work for others. The Final Rule explains that an employer’s actions for the sole purpose of complying with specific federal, state, local, or tribal laws or regulations are not indicative of control such that the worker would be classified as an employee. As an example, the commentary to the Final Rule provides that a homecare agency’s exercising control over a worker to ensure they comply with Medicaid regulations requiring that individuals with patient contact undergo background checks would not constitute control such that the worker could not be classified as an independent contractor. However, actions taken by a potential employer that go beyond compliance with a specific law or regulation and instead serve the employer’s internal compliance methods or other policies may be indicative of control by the employer.
Additional facts relevant to the potential employer's control over the worker include whether the potential employer uses technological means to supervise the performance of the work (such as by means of a device or electronically), 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. Whether the potential employer controls economic aspects of the working relationship should also be considered, including control over prices or rates for services and the marketing of the services or products provided by the worker.
Notably, the Final Rule omits a provision from the 2021 Independent Contractor Rule which minimized the relevance of an employer’s reserved but unexercised rights to control a worker. This omission suggests that an employer’s reserved contractual rights, even if unexercised, will be considered to a greater degree under the Final Rule. This highlights the importance of ensuring contracts setting forth an independent contractor relationship are drafted to accurately reflect the nature of the business relationship in practice, and that such contracts do not include terms which might suggest the potential employer exercises greater control over the worker than necessary to accomplish the work.
Extent to which Work Performed is an Integral Part of the Employer’s Business
This factor does not depend on whether the individual worker is integral to the employer’s business, but whether the function the worker performs is an integral part of the employer’s business. If the work performed is critical to the work of the employer’s business, this factor supports finding that the worker is an employee and not an independent contractor. If the work is not critical, necessary, or central to the employer’s principal business, then this factor supports classification as an independent contractor.
Skill and Initiative
The last factor under the Final Rule looks to whether the worker uses specialized skills to perform the work and whether the skills contribute to business-like initiative. The Final Rule explains that “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 potential employer to perform the work.” However, if the worker brings specialized skills to the work relationship, this is not itself indicative of the worker’s independent contractor status because both employees and independent contractors may be skilled workers. Rather, the question here is whether the worker uses their specialized skills in connection with business-like initiative, which indicates the worker is an independent contractor.
Additional Factors
In addition to the six factors described above, the Final Rule states that additional 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.
The Final Rule went into effect on March 11, 2024. Employers should review their processes and procedures related to worker classification for compliance with the Final Rule, as well as any existing independent contractor arrangements. Employers with questions about the Final Rule or worker classifications should contact Kate Townley at ktownley@fglawllc.com or any other attorney at the Firm.
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