In December 2022, we sent out a client alert regarding the United States Department of Labor’s (“DOL”) proposed rule to reclassify the standards for employees and independent contractors under the Fair Labor Standards Act (“FLSA”). The DOL initially published a proposed rule in October 2022 and held public comment on the rule through early November of that year. We expected the final rule to be issued in 2023 but for a host of reasons, publication of the final rule was delayed. On January 9, the final rule was finally released, and it was published on January 10. The new rule takes effect on March 11, 2024.
As we indicated in our December 2022 client alert, the new rule is likely to result in many more workers classified as employees rather than independent contractors. This, despite the DOL in the final rule stating that it does not believe the new rule will result in “widespread reclassification.”
This client alert will provide some high-level insights regarding the new rule. We encourage you to review classification of all your independent contractors considering this new rule, and please reach out to us if you have questions or would like assistance in auditing your independent contractor workforce.
This “new” test returns the independent contractor vs. employee examination to a “totality of the circumstances” examination but adds an additional factor to examine. We could highlight the previous test and the test prior to that (to which this “new” test largely returns), but we will save you the legal background and history and get right to what matters for employers. If you are fascinated by the law and/or want some material to help you sleep, though, just let us know and we will gladly expound on the history of this test!
As we indicated, this “new” test focuses on identifying workers through a “totality of the circumstances.” This means that each factor that determines a worker’s status is weighed equally. There are six factors outlined in the new test:
- Opportunity for profit or loss depending on managerial skill.
As the regulations state, “[t]his 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.” Opportunities are described as, but not limited to, whether the worker can determine or negotiate pay, whether the worker can accept or decline work and/or determine the times they work, whether the worker advertises their work and puts in effort to expand their business, and whether the worker has control over hiring and purchasing of materials, equipment, and/or rent space. The less control the worker has over these aspects of work, the more this factor suggests an employee status.
- Investments by the worker and the employer.
This factor examines the worker’s level of investment, with a focus on capital and entrepreneurial investments, in comparison to the employer. A worker who does not purchase as much equipment and materials or regulate the finances of their work is more likely to be classified as an employee. While the worker’s investments need not be equal to the employer’s, they should support an independent business or serve a business-like function. Unfortunately, there is no regulation outlining how much money a worker must spend to be classified as an independent contractor.
- Degree of permanence of the work relationship.
A worker is more likely to be considered an employee if they have an indefinite working relationship and/or exclusivity. Independent contractors tend to have definite periods of work, no exclusivity, and project-based working. This lack of permanence is indicative of an independent contractor. The focus is whether or not the permanence or lack thereof is due to the exercise of the worker’s business initiative.
- Nature and degree of control.
The more control an employer has over the performance and quality of work, the more likely a worker will be classified as an employee. These control factors include, but are not limited to, setting a schedule, work supervision, and/or limits on the worker seeking other employment.
- Extent to which the work performed is an integral part of the employer’s business.
If the work done by a worker is integral to the business, the worker is more likely to be classified as an employee. In this instance, integral means critical, necessary, or central. If the potential employer could not function without the service performed by the worker, then the work is integral.
- Skill and initiative.
Workers who preform specialized skills for an employer, particularly when those skill contribute to business-like initiative, are most often independent contractors. Employees do not provide a skill set outside of the realm of a business. Specialized skills are more indicative of an independent contractor.
- Additional factors.
This list of factors is non exhaustive. A court of the Department of Labor may take any other factors into consideration, if deemed relevant to economic dependence, and accord those factors equal weight.
As was the case during the previous iteration of the “totality of the circumstances” test, there are no bright line standards and application of this test is not an exact science. Examinations should be conducted on a case-by-case basis, and we recommend that you err on the side of employee classification. As the final rule reiterates, economic dependence remains the ultimate inquiry, which means that a worker is an independent contractor if the worker is, as a matter of economic reality, in business for themself. The factors above are designed and meant to guide your examination of economic dependence and no single factor is determinative or given greater weight than the others.
We are still reviewing the more than 300 pages that constitute the published rule and we will provide any further updates and/or points of clarification or guidance that we learn from our review.
While we continue to hope for an independent contractor test that can provide more certainty for employers that dutifully and preemptively conduct an examination of their workers, we simply are not there yet. This is particularly so when “additional factors” not specifically outlined in the rule can be used by courts or the DOL in reaching a conclusion on worker classification. That said, it still behooves employers to conduct such a preemptive examination and if you have questions about close calls, you should consult legal counsel.
It is important to remember that the DOL has stated that job titles and issuance of 1099s are not relevant to the determination of independent contractor status, thus employers should not rely on these matters with respect to worker classification.
If you have any questions, do not hesitate to reach out to us.