DOL Issues Final Rule on Independent Contractor Classification

On January 9, 2024, the US Department of Labor (“DOL”) released the final rule, changing the criteria for classifying independent contractors under the Fair Labor Standards Act (“FLSA”).  The final rule, which rescinds the 2021 rule, will take effect on March 11, 2024.

As an initial matter, this DOL rule determines whether a worker is an employee or non-employee of an employer for purposes of minimum wage and overtime rules.  Other independent contractor tests, such as those under the National Labor Relations Act, determine a worker’s status for other purposes, such as whether or not an employee can join a company’s union.  And then there are of course definitions of “employment” and non-employees for purposes of other laws, such as the Affordable Care Act.  Again, however, this article only focuses on the DOL rule that defines what workers are entitled to minimum wage and overtime protections, and from which employers. 

Pursuant to the 2021 worker classification rule, the analysis for classifying a worker involved two main factors; (1) the nature and degree of control over the relevant worker; and (2) an individual’s opportunity for profit or loss.  The 2021 rule also required analysis of 3 less critical factors; (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship; and (3) whether the work is part of an integrated unit of production. 

The new rule, which restores the former “totality of the circumstances” test, considers the following six factors:

1. The degree to which the employer controls how the work is done.

2. The worker’s opportunity for profit or loss.

3. The amount of skill and initiative required for the work.

4. The degree of permanence of the working relationship.

5. The worker’s investment in equipment or materials required for the task.

6. The extent to which the service rendered is an integral part of the employer’s business.

Furthermore, the analysis under the 6th factor has been changed to a consideration of whether the service provided by the worker is critical, necessary or central to the company’s business.  In contrast, the previous “test” looked at whether or not the worker was an integral part of the business.

DOL has indicated that it will be providing the public with additional guidance in order to aide in employer compliance.  However, DOL has noted that the above six factors are not exhaustive, that neither factor will be weighed heavier than another, and that indeed the entire situation will dictate the DOL’s conclusions.

Employers who rely on independent contractors should periodically conduct internal independent contractor audits to ensure that the workers to whom they are paying “project fees” or other similar lump sum amounts are proper methods of compensation for the worker at issue.  This new DOL rule underscores the importance of conducting these audits because the new rule will deem more workers as “employees” for purposes of minimum wage and overtime.