The Department of Labor Final Rule on Independent Contractors

This blog revisits a blog post published by The Law Group of Northwest Arkansas on October 26, 2022. The U.S. Department of Labor (DOL) published a notice of proposed rulemaking in late 2022 regarding the Biden administration’s approach to determining independent contractor status under federal wage law as provided by the Fair Labor Standards Act (FLSA). The comment period for this rule closed December 13, 2022.

Now, the DOL has released its Final Rule on Independent Contractors. Unless otherwise specified, all information in this blog has been taken directly from the Federal Register’s Final Rule Notice.

The Final Rule

The DOL final rule, published on January 10, 2024, goes into effect March 11, 2024. According to the Federal Register’s Executive Summary, this rule addresses “how to determine whether a worker is properly classified as an employee or an independent contractor” under the FLSA.

Further, the Federal Register explains that this rule serves to modify current Wage and Hour Division regulations by replacing its analysis for determining employee or independent contractor classification with analysis that is more consistent with judicial precedent and the FLSA.

Details of the New Rule

The DOL’s final rule has a few notable details. First, the previous 2021 Independent Contractor Rule has been revoked.

Next, a new analysis for determining whether a worker is an independent contractor has been outlined.

Further, the rule examines investment as a separate and integral factor in the analysis.

Finally, the rule discusses scheduling, remote supervision, price setting, and the ability to work for others, and allows for consideration of reserved rights. The final rule also discusses the significance of exclusivity and initiative.

The New Analysis

While the 2021 rule included a “core factors” test for determining if an individual was an independent contractor, this rule applies a new “totality of the circumstances” test. This test outlines six factors to determine whether an individual is an independent contractor or an employee, with the ultimate inquiry being whether or not the individual is financially dependent.

These factors, known as “economic reality factors,” are:

• opportunity for profit or loss depending on managerial skill
• investments by the worker and the potential employer
• the degree of permanence of the work relationship
• the nature and degree of control
• the extent to which the work performed is an integral part of the potential employer’s business, and
• Skill and initiative.

Importantly, these six factors are meant to be a guide for analyzing whether an individual is economically dependent or not.

No one factor decides the question on its own. Instead, they are meant to be a guidepost to determining a worker’s financial dependency.

Opportunity for Profit or Loss Depending on Managerial Skill

According to the rule, the opportunity for profit or loss depending on managerial skills focuses on “whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work.”

Facts to be considered in this analysis are whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/ or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.

This is a non-exhaustive list of factors that centers around the idea that, if a worker has no opportunity for profit or loss, they are likely an employee.

Investments by the Worker and the Potential Employer

According to the Federal Register, for investments by the worker to support independent contractor status, they must generally support an independent business and 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.

The worker’s investments should be considered with the potential employer’s, and in order for independent contractor status to be supported, they should show evidence that they support an independent business or function.

Degree of Permanence of the Work Relationship

The Federal Register goes on to say that the degree of permanence of the work relationship can weigh either for or against independent contractor status.

If the facts show an indefinite, continuous period of work – especially if the work is done exclusively for one potential employer – then the worker is more likely not an independent contractor.

However, if the work is definite, project based, or sporadic – especially if the worker markets themselves to multiple potential employers – then the evidence weighs in favor of independent contractor classification.

Importantly, the seasonal or temporary nature of work by itself is not sufficient to establish independent contractor classification.

Nature and Degree of Control

The Federal Register outlines that issues relating to scheduling, supervision of others, and the worker’s ability to work for others are all relevant control factors.

However, any “actions taken by the potential employer that go beyond compliance with a specific, applicable Federal, State, Tribal, or local law or regulation and instead serve the potential employer’s own compliance methods, safety, quality control, or contractual or customer service standards may be indicative of control.”

Providing further clarification, the rule indicates that actions taken by the potential employer in order to comply with specific laws or regulations would not weigh in favor of employer control.

Extent to Which the Work Performed is an Integral Part of the Potential Employer’s Business

This factor, according to the Federal Register, is framed in terms of whether the work performed is an integral part of the employer’s business.

Considerations in this analysis include whether the work is ‘‘critical, necessary, or central to the employer’s principal business.”

If so, the facts weigh against the classification of a worker as an independent contractor.

Skill and Initiative

Analysis of skill and initiative centers around the worker having specialized skills that contribute to business-like initiative.

In cases where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the employer to perform the work, the worker is less likely to be an independent contractor.

However, the Federal Register clarifies that workers who do not have specialized skills may still be independent contractors, based on the totality of the circumstances analysis.

What This Means for Employers and Contractors

The misclassification of an employee as an independent contractor could lead to many problems.

According to the Department of Labor, misclassification could lead to lessened protections for employees and withholding of employee benefits.

Furthermore, it could lead to violations of the Fair Labor Standards Act (FLSA) wage and hour requirements. Such a violation could lead to a substantial penalty under the FLSA.

Due to these concerns, both employers and independent contractors should take steps to familiarize themselves with the new independent contractor classification rule.

Questions About the DOL Ruling on Independent Contractors?

If you have any questions regarding The DOL Final Rule for determining if a worker should be classified as an employee or as an independent contractor, The Law Group of Northwest Arkansas PLLC can help.

Contact us through our online contact form or by calling (479) 316-3760 to schedule a free, initial consultation.