Background
On Jan. 9, 2024, the U.S. Department of Labor’s (DOL) Wage and Hour Division announced its final rule on Employee or Independent Contractor Classification. The announcement marks the end of a rulemaking process that started with the DOL’s Oct. 22 notice of proposed rulemaking (NPRM) on workers classification under the Fair Labor Standards Act (FLSA) Officials received more than 55,000 public comments in response to the NPRM. The new rule replaces a 2021 policy issued by the Trump administration and is based off an administrative interpretation issued by the DOL under the Obama administration. Like the NPRM, the final rule preserves the use of an “economic realities” test that analyzes an employee’s classification through the totality of the circumstances of the worker-employer relationship.
The DOL’s initial attempt to withdraw the Trump-era rule was stalled after a federal judge found that the DOL violated the Administrative Procedure Act (APA) by failing to properly seek comment or consider policy alternative before delaying and revoking the rule. The new rule will be published in the Federal Register on Jan. 10, and it will go into effect on March 11.
Classification Under the Final Rule
Unlike the Trump-era regulation, which gave greater weight to factors such as the amount of control workers have over their duties and the opportunity for profit or loss, no single factor in the new regulation is outcome determinative. The revised economic realities test relies on multiple factors, which include: 1) opportunity for profit or loss, 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, 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 also states that additional factors may be considered if those factors indicate a worker is in business for themself rather than being economically dependent on an employer.
In general, the rule defines the economic factors as follows:
- Opportunity for profit or loss: This factor considers facts such as: whether the worker can determine or meaningfully negotiate the payment for their work; whether the worker can accept or decline jobs, or otherwise determine the order in which jobs are performed; whether the worker advertises for their services; and whether the worker can decide to hire others or purchase resources. Workers with no opportunity for a profit or loss will tend to be employees rather than independent contractors.
- Investments by the worker and the employer: Under this factor, workers who make capital or entrepreneurial investments indicates independent contractor status. These include investments that increase a worker’s ability to do more work, reduce business costs or extend a business’s market reach. Costs incurred by workers such as to acquire tools, labor or other costs imposed by the employer are not considered capital or entrepreneurial investments.
- Degree of permanence of the work relationship: Under this factor, independent contractors will typically have working relationships that are definite in duration, nonexclusive, project-based or sporadic, as opposed to employees whose working relationships are typically open-ended. However, seasonal or temporary work does not necessarily indicate independent contractor status.
- Nature and degree of control: This factor considers whether the potential employer sets the worker’s schedule, supervises the work (including through technology or a device), or explicitly limits the worker’s ability to work for others. For example, a company that asks a worker to sign a non-compete may inadvertently create an employer-employee relationship with an individual intended to be an independent contractor.
- Extent to which the work performed is an integral part of the employer’s business: This factor considers whether the function that a worker performs is critical, necessary or central to the potential employer’s principal business. The more important the work is, the most likely the individual is an employee and not an independent contractor.
- Skill and initiative: Under this factor, workers will likely be considered employees if they do not use specialized skills to perform their work or they are dependent on training from the potential employer to perform their work. Additionally, workers with specialized skills will not automatically indicate independent contractor status. Instead, workers who use their specialized skills in connection with a business-like initiative will likely be considered independent contractors.
The final rule clarifies that actions taken by an employer for the sole purpose of complying with a specific local, state, or federal law will not count toward the “control” or “investment” factors for determining worker classification. The final rule, however, states that requirements by the employer that go beyond what the law requires may be indicative of control.
As expected, the final rule is less stringent than the controversial “ABC” tests deployed in some state-level independent contractor determinations; under ABC tests, independent contractor status can only be achieved if all three prongs of a three-factor test are satisfied. The DOL also published a series of Frequently Asked Questions to accompany the final rule.
Outlook
Speaking with reporters on Monday, Solicitor of Labor Seema Nanda said, “We feel very confident in this rule. We have very carefully considered the case law under FLSA in developing the rule and are certainly prepared to defend the rule if there are any challenges.”
The DOL argues that the new rule better comports with the Fair Labor Standards Act (FLSA), reduces the risk of employees being misclassified and provides greater consistency to businesses. However, some critics have already announced plans to prevent the new regulation from going into effect. Shortly after the DOL’s announcement, Senate HELP Committee Ranking Member Bill Cassidy (R-LA) announced that he will introduce a Congressional Review Act (CRA) resolution to repeal the rule. Additionally, several trade associations, including the American Trucking Association and the U.S. Chamber of Commerce, announced their opposition to the new rule and floated the possibility of pursuing litigation.
In addition to the new DOL rule, it is critical that businesses continue to comply with the Internal Revenue Service’s (IRS) separate rules on independent contractor classification for employer-tax purposes, as well as individual state laws for myriad employment-related issues. No doubt, the independent contractor question has created a web of compliance problems for companies who operate throughout the country, and the DOL’s rule does nothing to eliminate any of the pitfalls.
Worker classification will remain a hot political topic in the coming years with the persistence of the gig economy. Brownstein’s Labor and Employment and Government Relations teams will continue to follow these developments closely. If you would like additional information on or assistance with this rule, please do not hesitate to reach out to a member of either team.
THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING NEW DOL EMPLOYMENT REGULATIONS. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.