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Friday, January 26, 2024

Employment Alert: Department of Labor (DOL) Announces Final Independent Contractor Rule


By: Laurie A. Thompson

The Wage and Hour Division of the U.S. Department of Labor (DOL) published its Final Independent Contractor Rule in the Federal Register on January 10, 2024, becoming effective on March 11, 2024 ("Final Rule").   

The Final Rule goes back to the six factor totality of the circumstances "economic reality" test that courts applied prior to the  more streamlined two factor worker classification analysis issued by the Trump Administration in January 2021 came into effect.  

The 2021 version of the Independent Contractor Rule focused on two "core" factors in considering a worker's classification.

The two core factors in the 2021 version were: 

  1. the nature and degree of control over the relevant work
  2. an individual's opportunity for profit or loss

Under the 2021 version, which was considered to be less "employee friendly" the DOL labeled three other factors as less probative. 

Those three less probative factors were:

  1. the amount of skill required for the work
  2. the degree of permanence of the working relationship
  3. whether the work is part of an integrated unit of production

Under the Final Rule, the Department of Labor formally rescinds the 2021 Version and returns to the six factor test, with no one factor presumed to carry more weight than another.  

The six factors and the applicable analysis  are:

  1. Opportunity For Profit Or Loss Depending On Managerial Skill. If the worker has no opportunity for profit or loss than this factor suggests that the worker is an employee. The following facts, among others, are considered relevant: (a) whether the worker determines or can meaningfully negotiate the pay for the work; (b) whether the worker has the ability to accept or decline jobs or chooses the order and/or time in which the jobs can be performed; (c) whether the worker engaged in marketing, advertising or other efforts to expand their business or obtain more work; and (d) whether the worker can make decisions to hire others, purchase materials and equipment, and/or rent space. Situations where the worker decides to work more hours or take more jobs for a fixed rate of pay in order to increase profit generally would not reflect the exercise of managerial skill indicating independent contractor status. 
  2. Investments By the Worker And The Potential Employer. This factor considers whether the investments by the worker are capital or entrepreneurial in nature versus costs incurred to perform a specific job. Examples of investments that would be considered capital or entrepreneurial would be those that increase the worker's ability to do different types of, or more work, reduce costs or extend the business' market reach. Investments made to pay for tools and equipment or the cost of labor to perform a particular job are not capital or entrepreneurial in nature and indicate the worker is an employee. This part of the analysis also compares the investments made by the worker and the potential employer, i.e., are they making similar types of investments even if the worker is making them on a smaller scale?
  3. Degree Of Permanence Of The Work Relationship. This factor weighs in favor of independent contractor status when the relationship is definite in duration, non-exclusive, project based, or sporadic based on the worker being in business for themself and are marketing their services or labor to multiple entities. When the work relationship is indefinite in duration, continuous and exclusive of work for other employers this factor weighs in favor of employee status.
  4. Nature And Degree of Control. Facts considered to be relevant to this factor are whether the potential employer sets the worker's schedule, supervises the performance of the work, explicitly limits the worker's ability to work for others, uses technological means to supervise the performance of the work, and has the right to supervise or discipline the worker. Other considerations are whether the potential employer controls economic aspects of the working relationship such as control over prices or rates for services. More indicia of control by the potential employer favors employee status while less indicia of control by the potential employer favors independent contractor status.
  5. Extent To Which The Work Performed Is An Integral Part of the Potential Employer's Business. Analysis of this factor looks at whether the function performed by the worker is an integral part of the potential employer's business. This factor weighs in favor of employee status when the work being performed is critical, necessary or central to the potential employer's business. It weighs in favor of independent contractor status when the work being performed is not critical, necessary or central to the potential employer's business.
  6. Skill And Initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work or when the worker is trained by the potential employer. Even if the worker brings specialized skills to the work relationship that fact does not mean that it is an independent contractor relationship. Rather, it is the worker's use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor. 

The Final Rule is likely to face legal challenges. Additionally, the U.S. Supreme Court has a case before it this term in which it is asked to reconsider the "Chevron Doctrine" pursuant to which courts grant considerable deference to federal agency regulations. If the Chevron Doctrine is overturned the DOL's authority to enforce the Final Rule could be significantly restricted and the power will likely rest in the Federal Courts. 

Classification of workers can be confusing and the penalties for getting it wrong can be steep. Employers should seek legal assistance to ensure they are complying with the law. 

Disclaimer: The information set forth herein is for educational and informational purposes only and does not nor shall be construed to constitute legal advice, or the consummation of an attorney-client relationship.

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