DOL issues final rule for determining independent contractor status

On January 10, 2024, the Department of Labor published a final rule for determining independent contractor status under the Fair Labor Standards Act. This rule seeks to combat employee misclassification, which according to the DOL, “is a serious issue that deprives workers of basic rights and protections.” The final rule rescinds the 2021 Independent Contractor Rule and restores the totality-of-the-circumstances economic reality test, under which no single factor or group of factors is assigned any predetermined weight. It becomes effective March 11, 2024.

Correctly classifying workers as employees or independent contractors is crucial for businesses. It can affect a worker’s rights to minimum wage and overtime pay and an employer’s liability for failing to pay lawful wages. Unfortunately, the correct classification is not always obvious and misclassifications can be costly.

Under the final rule, a worker is not an independent contractor if they are, as matter of economic reality, economically dependent on an employer for work. The rule applies the following six factors to analyze employee or independent contractor status under the FLSA:

  1. opportunity for profit or loss depending on managerial skill;
  2. investments by the worker and the potential 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 potential employer’s business; and
  6. skill and initiative.

No factor or set of factors among this list has a predetermined weight. Additional factors may also be relevant if such factors in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work (i.e., an employee under the FLSA).

How does this final rule differ from the 2021 Independent Contractor Rule? In addition to restoring the totality-of-the-circumstances economic reality test, where no single factor or group of factors is assigned any predetermined weight, the final rule:

  • considers six factors, instead of five, including the investments made by the worker and the potential employer;
  • provides additional analysis of the control factor, including a detailed discussion of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the nature and degree of control over a worker; and
  • returns to the DOL’s longstanding consideration of whether the work is integral to the employer’s business (rather than whether it is exclusively part of an “integrated unit of production”).

Despite (or because of) the new final rule, difficulty and uncertainty surrounding independent contractor classifications is likely to continue for some time. Unfortunately, different circumstances can affect the relevancy of any specific factor, which makes it nearly impossible to adopt a one-size-fits-all approach to making this determination. Employers should carry Employment Practices Liability Insurance to protect against mistakes that are more likely to result from the confusion that always seems to accompany regulatory rule changes.

The Human Equation prepares all risk management and insurance content with the professional guidance of Setnor Byer Insurance & Risk.

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