On January 10, 2024, the U.S. Department of Labor (DOL) published its final rule, effective on March 11, 2024, revising the Department’s 2021 standard for determining whether a worker is an employee or an independent contractor under federal wage and hour law. The new final rule replaces the more business-friendly 2021 Trump administration rule, which made it easier to classify workers as independent contractors. In its place, the new final rule will implement a standard that will likely result in more workers being classified as employees. Businesses that currently classify workers as independent contractors need to be aware of the new final rule.
The new rule reinstates the DOL’s longstanding position (prior to the Trump-era rule) that a complex analysis of the “totality of the circumstances” is necessary to determine whether to classify a worker as an employee or independent contractor. This analysis is viewed as worker-friendly, in that it is more likely to lead to the conclusion the worker is an employee, rather than an independent contractor.
Under the prior 2021 rule, the DOL analyzed five different factors but afforded greater weight to two core factors: (1) the nature and degree of the individual worker’s control over the work and (2) the individual’s opportunity for profit and loss. The prior rule further stated that the other three factors—the amount of skill required for the work, the degree of permanence of the working relationship and whether the work is part of an integrated unit of production—were highly unlikely to outweigh the probative value of the two core factors. Now, instead of giving more weight to two core factors, the new rule applies six non-exhaustive factors equally, with no factor to be given predetermined weight over other factors.
The new rule is currently facing several legal challenges. In fact, no less than four separate lawsuits seeking to prohibit the new rule’s implementation are currently proceeding in federal district courts in Georgia, Louisiana, Tennessee and Texas. These lawsuits allege various arguments, including that the new rule is arbitrary and capricious under the Administrative Procedure Act, violates the Regulatory Flexibility Act and is unconstitutionally vague.
Nonetheless, businesses should review the new rule carefully and evaluate their classification policies and practices. In light of the publicity surrounding the new rule, companies are likely to face questions from workers regarding why they are classified as independent contractors rather than employees. The six factors set forth in the new rule are outlined in more detail below.
A Breakdown of the Six Factors
1) The worker’s opportunity for profit or loss depending on managerial skill. If a worker has limited or no opportunity to affect profit or loss through the exercise of managerial skill, then this factor suggests that the worker is an employee. The following facts may be relevant to this inquiry:
- Whether the worker determines the charge or pay for the work provided (or can meaningfully negotiate it);
- 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.
2) Investments by the worker and the potential employer. Investments that are capital or entrepreneurial in nature indicate independent contractor status. Investments that “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,” support independent contractor status. In contrast, costs to perform the job (e.g., tools and equipment to perform a specific job, use of a personal vehicle already owned, costs unilaterally imposed by the company) are not viewed by the DOL as capital or entrepreneurial investments supporting independent contractor status.
3) Degree of permanence of the work relationship. This factor weighs in favor of employee status when the relationship is indefinite in duration, continuous or exclusive of work for other companies. It weighs in favor of independent contractor status when the work relationship is definite in duration, non-exclusive, project-based or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities. While a relevant consideration, the mere ability to work for others is not necessarily an indicator of independent contractor status.
4) Nature and degree of control over the worker. The more control the potential employer exercises over the worker, the more likely this factor will favor classifying the worker as an employee. The less control the potential employer exercises over the worker, the more likely this factor will favor classifying the worker as an independent contractor. The DOL highlights that setting a worker’s schedule, compelling attendance or directing or supervising the work are examples of “direct” control, but notes that companies may also exercise control in other, indirect ways. “Indirect” control may include setting prices for services, restricting a worker’s ability to work for others and relying on technology or digital tools to supervise a workforce. The control factor can also be established by the potential employer’s compliance requirements for its workforce. For example, stringent safety standards, quality assurance and customer service standards can indicate the worker is an employee rather than an independent contractor.
5) Extent to which the work performed is an integral part of the potential employer’s business. This factor does not depend on whether any individual worker, in particular, is an integral part of the business, but rather whether the function they perform is an integral part of the business. This factor weighs in favor of the worker being classified as an employee when the work they perform is critical, necessary or central to the potential employer’s principal business. For example, where a potential employer’s primary business is to make a product or provide a service, the workers who make the product or provide the service are integral.
6) Level of specialized skill and business-like initiative required to perform the work. This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work. It is the worker’s use of specialized skills in connection with business-like initiative that indicates the worker is an independent contractor, not the mere fact that a worker brings a specialized skill to the work relationship.
Why Does it Matter if Workers Are Properly Classified?
The definition of “independent contractor” matters because it triggers coverage under the federal Fair Labor Standards Act (FLSA). The distinction between employees and independent contractors can affect the wages, overtime pay and other benefits that the employer must provide to its workers. Misclassification occurs when a worker is technically an “employee” under the FLSA but is instead treated as an independent contractor by the employer. It is the employer's responsibility to determine if a worker is an employee or independent contractor. Workers are presumed to be “employees” unless proven otherwise.
Proper classification of employees is important because misclassification can result in the DOL launching an investigation and potentially bringing an enforcement action against the employer. It can also result in significant collective- and class-action lawsuits brought by misclassified employees. The potential penalties in such a lawsuit would include lost wages, lost overtime pay, liquidated damages and reasonable attorney’s fees. Liquidated damages in this context mean that the amount of unpaid damages and overtime pay will be doubled as a penalty.
Importantly, the new rule is limited in its application because it only applies to the FLSA. The new rule does not directly govern how other federal and state agencies determine independent contractor status. The test for independent contractor status under the FLSA varies from other federal laws, such as the Internal Revenue Code and National Labor Relations Act. Further, states have their own tests for independent contractor status under various state laws.
What Can Employers Do Now?
Businesses should work with counsel to revisit their existing independent contractor arrangements to determine whether workers would be considered employees under the new rule and how these arrangements (including any written agreements) should be revised in a manner consistent with current law. Businesses should prepare to answer questions from their workers regarding whether they are properly classified as independent contractors. Additionally, businesses may consider using arbitration and collective- and class-action-waiver clauses in their independent contractor agreements. These clauses, when properly drafted, can minimize the likelihood of collective- and class-action lawsuits. Finally, businesses should stay abreast of the various legal challenges to the new rule’s implementation.
Steven joined Stoll Keenon Ogden in 2015 and is a Member of the Labor, Employment & Employee Benefits practice. He represents employers in a wide variety of workplace issues, including discrimination claims, wage and hour disputes, compliance and prevention.
Kirby is an Associate in the Louisville office. A native of Paducah, Kentucky, she joined the firm in 2022 and is in the Labor, Employment & Employee Benefits practice group. Prior to joining SKO, Kirby spent a year as a law clerk to the Honorable Thomas B. Russell, senior judge for the U.S. District Court for the Western District of Kentucky.
