On January 9, 2024, the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) released a final rule—going into effect beginning March 11—that will determine whether a worker can be classified as an independent contractor as opposed to an employee under the Fair Labor Standards Act (FLSA). The 2024 rule modifies regulations by adopting an analysis the agency claims is more consistent with judicial precedent and the FLSA’s text and purpose than the 2021 rule issued by the agency during the final days of the Trump administration.
Background
Under the FLSA, independent contractors in business for themselves don’t qualify for the minimum wage and overtime pay protections that apply to employees. Although the Act doesn’t define the term “independent contractor,” the DOL and the courts have applied the economic reality test since the 1940s to determine whether a worker is an employee or an independent contractor, the ultimate inquiry being whether, as a matter of economic reality, the worker is economically dependent on the employer for work (an employee) or is in business for themselves (an independent contractor).
To assess economic dependence, the DOL and the courts have historically conducted a totality-of-the-circumstances analysis that considers six factors, with no single factor being dispositive or having more weight. The six factors considered include:
- The worker’s opportunity for profit or loss;
- The worker’s investments compared with the business’s investments;
- Permanency;
- Actual and reserved control by the business;
- Whether the work is an integral part of the business; and
- The criticality and uniqueness of the worker’s skill and business initiative.
In January 2021, the DOL under the Trump administration published its 2021 rule titled Independent Contractor Status Under the Fair Labor Standards Act. The 2021 rule departed from the long-standing application of the economic reality test by, among other things, simplifying the analysis and identifying just five economic reality factors, designating two factors as core factors.
What’s New
Concerned that the 2021 rule would result in more workers being classified as independent contractors instead of employees and their loss of FLSA protections, the Biden administration issued a notice of proposed rulemaking on October 11, 2022, outlining a more employee-friendly approach to determining independent contractor status, which generated approximately 55,400 comments.
In its new final rule, the DOL rescinded the 2021 rule and returned to a standard that’s, on its face, more consistent with judicial precedent and the agency’s long-standing guidance. However, the 2024 rule leaves little doubt that the analysis of independent contractor status is now tilted in favor of a finding of employee status.
The 2024 rule adopts the six-factor economic reality test and contains no safe harbor for classifying a worker as an independent contractor and no real-life examples of independent contractor status. Along the way, the new rule states that a temporary work relationship, the worker’s investment in tools and equipment to perform the job, and the worker’s specialized skills don’t indicate independent contractor status.
On the other hand, the worker’s decision to work more hours to enhance income; their open-ended relationship with the business; and their performance of work that’s critical, necessary, or central to the business all indicate employee status.
The 2024 rule also discusses how scheduling, remote supervision, price setting, and the ability to work for multiple businesses enter into the analysis of who controls the worker’s workday. Unlike the 2021 rule, the DOL’s 2024 rule provides no guidance about what weight an employer and the enforcement agency should give to any factor. Further muddying the analysis is the rule’s statement that additional factors may be relevant in the analysis, with no hint about what these factors might be.
Bottom Line
Clearly, the DOL’s 2024 rule will make it riskier for employers to justify classifying workers as independent contractors. It forces employers to guess which factors should be emphasized and given the greatest weight in classifying workers and will likely result in more confusion and litigation because of the lack of practical guidance on who qualifies as an independent contractor.
Congressional, business, and industry group challengers, such as the U.S. Chamber of Commerce, may succeed in delaying the effective date of the 2024 rule or repealing it altogether. The House Committee on Small Business is urging the DOL to reconsider the rule, arguing it will disproportionately affect smaller businesses.
For more information, please contact Patrick W. McGovern, partner in Genova Burns LLC’s labor law and employment law and litigation practice, via email at pmcgovern@genovaburns.com.