The DOL’s New (But Familiar) Independent Contractor Rule
After a long wait, the U.S. Department of Labor (“DOL”) published its final rule regarding proper independent contractor classification on January 10, 2024. The DOL initially issued the Notice of Proposed Rulemaking for this rule back in October 2022. This rule will take effect on March 11, 2024.
The new final rule largely mirrors the DOL’s prior proposed rule, which Baird Holm previously reported on in detail. For purposes of the Fair Labor Standards Act, employers must analyze “the economic realities of the worker’s relationship with the worker’s potential employer and whether the worker is either economically dependent on the potential employer for work or in business for themselves.” Essentially, the DOL’s “economic realities” test for distinguishing independent contractors and employees hinges on this idea of economic dependence.
Considering the “totality-of-the-circumstances,” the DOL will use the following factors to determine whether an independent contractor is properly classified:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the potential employer;
- Degree of permanence of the work relationship;
- Nature and degree of control;
- Extent to which the work performed is an integral part of the potential employer’s business; and
- Skill and initiative.
These six factors are not exhaustive, nor is any one factor necessarily dispositive. This means, under the DOL’s new rule, employers should carefully review independent contractors on an individualized basis as this will be a largely fact-based analysis.
What is new? As mentioned, most of the language reflects the DOL’s proposal from October 2022. However, the agency made some clarifications with regard to the factors following the approximately 55,400 comments it received from interested stakeholders. Here’s what to keep in mind for each factor:
Opportunity for profit or loss depending on managerial skill
This factor considers “whether the worker has opportunities for profit or loss based on managerial skill (including initiative or business acumen or judgment) that affect the worker’s economic success or failure in performing the work. This includes:
- 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.
No opportunity for a profit or a loss would likely weigh towards an “employee” designation.
Investments by the worker and the potential employer
This factor contemplates whether “any investments by a worker are capital or entrepreneurial in nature. This analysis looks to identify investments (even if small in nature) that suggest whether the worker is operating independently. By way of example, the DOL notes that costs like tools or equipment to complete the job, labor costs, and other costs that the potential employer unilaterally imposes are not evidence of “capital or entrepreneurial” costs and indicate employee status. On the other hand, investments that are capital or entrepreneurial in nature that indicate independent contractor status include investments that increase the worker’s ability to do different types of or more work, reduce costs, or extend market reach.
Additionally, the DOL states that the worker’s investments should be considered on a relative basis with the potential employer’s investments in its overall business. The focus should be on comparing the investments to determine whether the worker is making similar types of investments as the potential employer (even if on a smaller scale) to suggest that the worker is operating independently, which indicates independent contractor status. The worker’s investments need not be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of investments or the sizes of the worker and the potential employer.
Degree of permanence of the work relationship
This factor considers the duration, definiteness, exclusivity, and type of work relationship. For instance, in many circumstances, an indefinite or continuous relationship suggests an employment relationship because of the similarity to at-will employment. In contrast, independent contractor work is more likely to be definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services to other entities. However, the DOL also recognizes that “lack of permanence” is not necessarily an indicator of independent contractor status, such as what is commonly found in certain temporary and seasonal work, depending on the business or industry.
Nature and degree of control
This factor considers the potential employer’s control (including reserved control) over the performance of the work and the economic aspects of the working relationship, such as:
- Whether the potential employer sets the worker’s schedule, supervises the performance of the work, or explicitly limits the worker’s ability to work for others;
- Whether the potential employer uses technological means to supervise the performance of the work (such as by means of a device or electronically), reserves the right to supervise or discipline workers, or places demands or restrictions on workers that do not allow them to work for others or work when they choose; and
- Whether the potential employer controls economic aspects of the work, such as control over prices or rates for services.
The more control or supervision a potential employer exercises, the more this factor weighs towards an employment relationship.
In a change from the proposed rule, the DOL notes that a potential employer’s actions to comply with a specific federal, state, or local law or regulation is not indicative of control. For instance, the potential employer can require adherence with specific compliance, safety, or quality control legal obligations without factoring into this “control” analysis. However, actions taken by the potential employer that go beyond compliance with specific laws and instead serve the potential employer’s own compliance methods, safety, quality control, or customer services standards may be indicative of control.
Extent to which the work performed is an integral part of the potential employer’s business
This factor considers whether the work performed (as a function) is an integral part of the potential employer’s business. For instance, if the potential employer could not function without the service performed by the workers, the service they provide is integral. Examples of integral work include, “picking pickles in a pickle business,” and “coal unloaders of a retail coal company. Work that is considered “critical, necessary, or central” to the potential employer’s principal business is likely to weigh towards an employment relationship.
Skill and initiative
This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. The DOL updated the final rule to specify that it is not the worker’s specialized skill itself that affects analysis, but rather whether the worker uses the specialized skills “in connection with business-like initiative.”
In conjunction with final rule publication, the DOL also published a series of Frequently Asked Questions on its website regarding independent contractor classification. Employers should carefully review independent contractor and employee classifications under the FLSA in light of the DOL’s new rule.