DOL Issues Final Rule on Independent Contractor Classification

On January 9, the U.S. Department of Labor (DOL) issued its final rule (the Final Rule) for determining whether a worker is an employee or independent contractor for purposes of the Fair Labor Standards Act (the FLSA), replacing a rule adopted by the previous administration in 2021 (the 2021 Rule). The Final Rule is important to employers from both a cost and compliance perspective because it may result in more workers being classified as employees than under the 2021 Rule.¹ The Final Rule, which becomes effective March 11, sets forth a “totality-of-the-circumstances” test with six factors emphasizing economic dependence as key to the underlying determination, but with no one factor presumed to carry more weight than any other. The Final Rule’s broader analysis is in contrast to the 2021 Rule, which set forth five “economic realities” factors with two “core factors” designated as having greater weight in the analysis. The factors set forth in the Final Rule are as follows:

• Opportunity for Profit or Loss Based on Managerial Skills: This factor considers the extent to which a worker’s managerial skills affect their economic success or failure. Relevant considerations include the worker’s ability to negotiate payment terms, accept or decline work arrangements or manage job order and timing, engage in marketing efforts, and make decisions regarding hiring and purchasing materials, equipment, and/or rental space. If a worker has no opportunity for profit or loss, then this factor would suggest employee status.
• Role of Investments: This factor considers whether a worker’s investments are capital or entrepreneurial in nature. Investments that empower a worker to perform different types of work or more work, reduce costs, or expand their market presence suggest independent contractor status. This analysis focuses on a qualitative comparison as to whether a worker is making similar types of investments as a potential employer, and if so, that would suggest that the worker is operating independently.
• Degree of Permanence of the Work Relationship: This factor considers the duration, continuous nature, and exclusivity of the work relationship. Indefinite, continuous, or exclusive work arrangements suggest employee status, while definite in duration, non-exclusive, project-based, or sporadic relationships suggest independent contractor status. If a lack of permanence is a business or industry-specific characteristic, this factor is not weighed in favor of independent contractor status unless the lack of permanence results from the worker exercising independent business initiative.
• Nature and Degree of Control: This factor considers the level of control exerted by the potential employer over performance of the work and economic aspects of the work relationship. Key considerations include control over scheduling, supervision of work (including through technological supervision methods), limitations on the ability to work for other entities, control over rates for services, and marketing of the workers’ services. Compliance with internal safety, quality control, contractual, or customer standards that go beyond compliance with laws can also indicate economic dependence on the employer and weigh towards employee status. More indicia of control by the potential employer favors employee status; more indicia of control by the worker favors independent contractor status.
• Extent to Which the Work Performed Is Integral to the Employer: This factor considers whether the function a worker performs is an integral part of the potential employer’s business. When the work a worker is performing is critical, necessary, or central to the potential employer’s principal business, this factor weighs in favor of employee status.
• Skill and Initiative: This factor considers the use of specialized skills and whether those skills contribute to business-like initiative. When workers rely on employer-provided training or perform tasks that require no specialized training, this factor suggests employee status. Workers using specialized skills in connection with business-like initiative would indicate independent contractor status.

In addition, the Final Rule permits considerations of additional factors relevant to the overall question of economic dependence.

Potential Implications and Next Steps

Employers should review both the substance of the relationship with their workers and any agreements with workers to determine whether the “economic reality” is that the worker is (or is not) independent from the employer under the broad scope of considerations set forth in the Final Rule, especially in the case of any worker previously examined under the 2021 Rule and classified as an independent contractor. As noted above, the Final Rule may result in more workers being classified as employees for purposes of the FLSA, thus increasing the costs and compliance burden of employers, by entitling them to minimum wage and certain other protections such as the overtime rules and the Family and Medical Leave Act. Further, while the Final Rule only applies to the DOL and the FLSA, if workers are reclassified as employees under the Final Rule, employers should be mindful of the effect that action may potentially have with respect to other federal and state laws that rely on a worker classification system (which may be stricter or more employee-friendly than the Final Rule), such as income and employment tax withholding, coverage under the Affordable Care Act, participation in employee benefit plans, employee benefit plan non-discrimination testing, and state-level wage/hour requirements. At present, it is unclear how much impact, if any, the Final Rule might have on such other federal and state laws. Prudent employers should continue to monitor changes to all federal and state laws relating to the classifications of workers; review and update internal processes and safeguards for hiring independent contractors; review and strengthen independent contractor agreements and internal policies; train managers on how to work with independent contractors; and work with legal counsel to conduct privileged preventive audits.

If you have any questions about the Final Rule or worker classification, please reach out to a member of our team.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.