Are Your Workers Independent Contractors or Employees: A New DOL Rule Aims to Help Employers Answer That Question

The U.S. Department of Labor’s (DOL) Wage and Hour Division updated its regulation concerning Employee or Independent Contractor Classification Under the Fair Labor Standard Act, with changes effective March 11, 2024. The revised rule finalizes the proposed rulemaking released in October 2022 with a goal ostensibly to remove confusion over whether a worker falls into the” employee” or “independent contractor” classification for wage and hour purposes. According to the DOL, the updated analysis for classifying “employee” and “independent contractor” seeks to be more consistent with judicial precedent and the Fair Labor Standard Act’s text and purpose.

The terms “worker,” “employee,” and “independent contractor” are often misinterpreted and inappropriately used interchangeably. Because classification as an “employee” provides certain protections, including minimum wage and overtime pay requirements, it is essential that employers make the correct classification. To help prevent misclassification, the DOL has created a resource page, including a helpful infographic, here: Misclassification of Employees as Independent Contractors Under the Fair Labor Standards Act | U.S. Department of Labor (dol.gov) 

What Is the New Rule the Department of Labor Is Adopting?

As of March 2024, the DOL has adopted the economic reality test to determine a worker’s correct classification for purposes of federal wage and hour laws. This test considers the following factors to assess whether a worker is economically dependent on the employer, or if, instead, they are in business for themselves:

1. Opportunity for profit or loss depending on managerial skill
2. Investments by the worker and the employer
3. Degree of permanence of the work relationship
4. Nature and degree of control
5. Extent to which the work performed is an integral part of the employer’s business
6. Skill and initiative

The updated rule does not use a “core factors” approach to the economic reality test; instead, it looks at the totality of the circumstances. No single factor is determinative, and each is considered in connection with the economic reality of the worker’s entire activity. Factors do not have a predetermined weight.

When determining whether a worker is an employee or independent contractor, the assessment’s focus is “the economic dependence” of the worker. In other words, as stated in the final rule, the “statutory language thus frames the central question that the economic reality test asks—whether the worker is economically dependent on an employer who suffers or permits the work or whether the worker is in business for themself.”

In its final rule, the DOL clarified that economic dependence focuses on whether the worker is in business for themselves and does not focus on the amount of money the worker earns or whether they have other sources of income.

How Does the New Rule Differ from the 2021 Independent Contractor Rule?

This new rule replaces and updates the guidance in the 2021 Independent Contactor Rule. In seeking to align with judicial precedent, the updated rule makes the following key changes:

• Returns to a totality-of-the-circumstances economic reality test, with no single factor or group of factors having predetermined weight;
• Looks to six factors (instead of five), including any investments made by the worker and the potential employer;
• Provides an additional analysis of the control factor, with a detailed discussion of how scheduling, supervision, pricing, and the ability to work for others should be considered;
• Returns to the DOL’s consideration of whether the work is integral to the employer’s business versus the work being exclusively part of an “integrated unit of production”;
• Provides additional context to some factors; and
• Removes a provision from the 2021 Independent Contractor Rule that had minimized the relevance of an employer’s reserved but unexercised rights to control a worker.

Legal Challenges and What Employers Should Do Now?

Unsurprisingly, after the DOL announced that the New Rule would go into effect March 11, 2024, the DOL was met with legal action challenging the new rule. Large organizations, small businesses, and even individuals have challenged the new rule, claiming it lacks predictability and negatively impacts several industries. It appears that for many, this new rule is not as clear cut as the DOL hoped and makes it more difficult to categorize workers as independent contractors. We will watch closely as the DOL responds to the nationwide claims challenging the new rule and how it will affect implementation.

Employers should review their census of employees and independent contractors in light of the updated analysis and ensure individuals are classified appropriately for purposes of wage and hour requirements, paying special attention to individuals classified as independent contractors. Employers also should keep in mind that workers classified as independent contractors must pass the test explained above under federal law as well as any tests that may be required by state laws.   

If you have questions about the proposed rule, independent contractor classification, or other labor and employment matter, do not hesitate to reach out to the Employment & Executive Compensation Group at Levenfeld Pearlstein.

For additional information on the updated rule, please see the DOL’s resource with FAQs: Frequently Asked Questions – Final Rule: Employee or Independent Contractor Classification Under the FLSA | U.S. Department of Labor (dol.gov)