January 30, 2024

New Department of Labor Rule May Soon Make It Harder to Classify Workers as Independent Contractors

Written By

Steven T. Clark
Member, Stoll Keenon Ogden PLLC
Kirby A. Black
Associate, Stoll Keenon Ogden PLLC

On January 10, 2024, the U.S. Department of Labor (DOL) published its final rule, effective on March 11, 2024, revising the Department’s 2021 standard for determining whether a worker is an employee or an independent contractor under federal wage and hour law. The new final rule replaces the more business-friendly 2021 Trump-era rule, which made it easier to classify workers as independent contractors. In its place, the new final rule will implement a standard that will likely result in more workers being classified as employees. Businesses that currently classify workers as independent contractors need to be aware of the new final rule.

The new rule reinstates the DOL’s longstanding position (prior to the Trump-era rule) that a complex analysis of the “totality of the circumstances” is necessary to determine whether to classify a worker as an employee or independent contractor. This analysis is viewed as worker-friendly, in that it is more likely to lead to the conclusion the worker is an employee, rather than an independent contractor.

Under the prior 2021 rule, the DOL analyzed five different factors, but afforded greater weight to two core factors: (1) the nature and degree of the individual worker’s control over the work; and (2) the individual’s opportunity for profit and loss. The prior rule further stated that the other three factors—the amount of skill required for the work, the degree of permanence of the working relationship, and whether the work is part of an integrated unit of production—were highly unlikely to outweigh the probative value of the two core factors. Now, instead of giving more weight to two core factors, the new Rule applies six non-exhaustive factors equally, with no factor to be given predetermined weight over other factors.

The new rule will likely face legal challenges––business groups have already signaled they will oppose the rule in court––and it could see delay in implementation. However, businesses should review the new rule carefully and evaluate their classification policies and practices. Companies are likely to face questions from workers regarding why they are classified as independent contractors rather than employees. The six factors set forth in the new rule are outlined in more detail below.

A Breakdown of the Six Factors

1) The worker’s opportunity for profit or loss depending on managerial skill. If a worker has limited or no opportunity to affect profit or loss through the exercise of managerial skill, then this factor suggests that the worker is an employee. The following facts may be relevant to this inquiry:

2) Investments by the worker and the potential employer.  Investments that are capital or entrepreneurial in nature indicate independent contractor status. Investments that “serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach,” support independent contractor status. In contrast, costs to perform the job (e.g., tools and equipment to perform a specific job, use of a personal vehicle already owned, costs unilaterally imposed by the company) are not viewed by the DOL as capital or entrepreneurial investments supporting independent contractor status.

3) Degree of permanence of the work relationship.  This factor weighs in favor of employee status when the relationship is indefinite in duration, continuous, or exclusive of work for other companies. It weighs in favor of independent contractor status when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities.  While a relevant consideration, the mere ability to work for others is not necessarily an indicator of independent contractor status.

4) Nature and degree of control over the worker.  The more control the potential employer exercises over the worker, the more likely this factor will favor classifying the worker as an employee. The less control the potential employer exercises over the worker, the more likely this factor will favor classifying the worker as an independent contractor. The DOL highlights that setting a worker’s schedule, compelling attendance, or directing or supervising the work are examples of “direct” control, but notes that companies may also exercise control in other, indirect ways. “Indirect” control may include setting prices for services, restricting a worker’s ability to work for others, and relying on technology or digital tools to supervise a workforce.

5) Extent to which the work performed is an integral part of the potential employer’s business.  This factor does not depend on whether any individual worker in particular is an integral part of the business, but rather whether the function they perform is an integral part of the business. This factor weighs in favor of the worker being classified as an employee when the work they perform is critical, necessary, or central to the potential employer’s principal business. For example, where a potential employer’s primary business is to make a product or provide a service, the workers who make the product or provide the service are integral.

6) Level of specialized skill and business-like initiative required to perform the work. 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. It is the worker’s use of specialized skills in connection with business-like initiative that indicates the worker is an independent contractor, not the mere fact that a worker brings a specialized skill to the work relationship.

Does it Matter if Your Workers Are Properly Classified?

Yes. The definition of “independent contractor” matters because it triggers coverage under the federal Fair Labor Standards Act (FLSA). The distinction between employees and independent contractors can affect the wages, overtime pay, and other benefits that the employer must provide to its workers. Misclassification occurs when a worker is technically an “employee” under the FLSA but is instead treated as an independent contractor by the employer. It is the employer’s responsibility to determine if a worker is an employee or independent contractor. Workers are presumed to be “employees” unless proven otherwise. Proper classification of employees is important because misclassification can result in the DOL launching an investigation and potentially bringing an enforcement action against the employer. It can also result in significant class-action-style lawsuits brought by misclassified employees seeking unpaid wages.

What Can You Do Now?

Businesses should coordinate with their attorney to revisit their existing independent contractor arrangements to determine whether workers would be considered employees under the new rule and how these arrangements (including any written agreements) should be revised to better protect your interests. Businesses may also consider working with an attorney to review classifications to ensure they comply with the new Rule, and review contracts with staffing providers to clarify degrees of control. Additionally, Businesses should prepare to answer questions from their workers regarding whether they are properly classified as independent contractors, and why they are not, and should not be, classified as employees and provided with all accompanying employee benefits.

It is also important to note that the new rule only applies to the FLSA. It has no impact on any state wage and hour laws that do not follow the FLSA for determining how a worker should be classified. Additionally, the new rule does not define who may qualify as an independent contractor under other federal statutes or laws such as the Internal Revenue Code or National Labor Relations Act.

We Can Help

Stoll Keenon Ogden’s Labor, Employment & Employee Benefits practice has a proven record of being trusted advisors and effective advocates. We help employers solve their problems through proactive counseling, employee training and, where possible, cost-efficient litigation, including alternative dispute resolution. We know the employment laws thoroughly, and we make it our goal to acquire a comprehensive knowledge of our clients and their business, so we can provide tailored solutions for each of their needs.

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