On January 9, 2024, the U.S. Department of Labor issued final rules for employers to determine if a worker is an independent contractor or employee. Workers who do not meet the new criteria under the rule must be classified as employees and subject to the Fair Labor Standards Act (“FLSA”) protections and requirements. If misclassified, these workers must be treated as employees and will be eligible for overtime pay, unless they otherwise satisfy the requirements to be considered exempt, and be subject to the minimum wage requirements under the FLSA. The employer would also need to comply with the recordkeeping requirements and maintain daily and weekly time records for the worker.
These final rules replace the less stringent 2021 independent contractor regulations, issued by the Trump DOL, which focused on two “core” factors regarding the worker’s control of their work and the worker’s profit and loss in performing the work. If those two “core” factors were met, the worker was an independent contractor; however, if one of the two “core” factors were not met, then three additional “non-core” factors would be analyzed. Those “non-core” factors address the amount of skill required for the work, the working relationship permanence, and whether the work is “part of an integrated unit of production.” The Trump DOL’s independent contractor test was more business-friendly and provided a more streamlined approach. So not surprisingly, the Biden DOL quickly moved to replace those regulations. The Biden DOL final rules have eliminated the “core” and “non-core” factors and claims to “return to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.” But the “devil is in the details.”
The final rules contain six non-exhaustive factors used by courts when analyzing whether a worker is an independent contractor or employee, which are as follows:
- The opportunity for profit or loss depending on management skill;
- The relative investments by the worker and business engaging the worker;
- The degree of permanence of the work relationship;
- The nature and degree and control over the worker;
- The extent to which the work is performed is an integral part of the business; and
- The worker’s skill and initiative.
Even though courts and the DOL have applied these factors or similar variations of these factors for decades, courts’ interpretations are inconsistent, at best. Therefore, make no mistake, the new rules eliminate the “core” factors set forth by the Trump DOL and shifts the focus on one of the “non-core” factors, which almost always points to an employee status, specifically, if the work is “integral to the employer’s business.”
The final rules also provide minor changes to some other factors, which are more employee-friendly in their interpretation. For example, the second factor now provides “costs that the potential employer imposes unilaterally on the worker… are not evidence of… investment and indicate employees status.” The fourth factor allows businesses to require workers to comply with state, federal, or local laws and not be considered control, but it must be the sole reason; otherwise, the potential employer will be considered controlling the worker. The sixth factor now focuses on the skill and initiative, which must be more than specialized skill, “because both employees and independent contractors may be skilled workers.” The rules also add a catch-all seventh factor, which allows any factor that “in some way indicate whether the worker is in business for themsel[ves], as opposed to being economically dependent on the potential employer for work.” And although the first factor focuses on whether the worker has an opportunity for profit or loss, compared to exercising it managerial skills for profit or loss, overall, the final rules lean towards classifying most workers as employees, versus independent contractors.
The final rules are set to take effect on March 11, 2024. The new rules purport to elaborate upon the “economic reality tests” developed by the courts over the past many decades by providing potential employers six non-exhaustive factors to determine whether or not a worker is an independent contractor or employee.
Legal challenges are expected and are likely to focus on whether the Department has authority to redefine long-established judicial doctrine through these rules and by the stroke of the pen to convert untold thousands of workers from contractor to employee status. Should the rules survive these challenges, they could result in dramatic changes in how businesses get work done and cause many contractors to lose the independent contractor status they covet.
Employers can expect to see more DOL enforcement relating to these final rules, which makes it a good time to critically review any independent contractor agreements and relationships. Employers should revise their independent contract agreement to ensure that a properly drafted arbitration provision is in place, as well as, other key provisions to better protect the employer from future litigation, if their worker’s employment status is challenged. Navigating these factors will not be easy. While some workers may easily satisfy the new tests, others—particularly those whose services directly relate to the business of the employer (other than perhaps plumbing and lawn services, for example)—may be in a gray area and necessitate a more highly sophisticated review. Doing such a review may avoid liability, but if liability is still found, undertaking such a review in good faith may at least shorten the applicable statute of limitations and insulate employers from claims for liquidated damages. In other words, taking proactive action now can substantially result in less liability later.