U.S. Department of Labor Issues Final Rule on Independent Contractor Classification

The U.S. Department of Labor (DOL) has recently issued a final rule that revises the classification criteria for independent contractors. This rule, which takes effect March 11, 2024, marks a departure from the 2021 rule which considered fewer factors and emphasized two factors are most important to the determination.  The new rule reinstates the economic reality test which evaluates the totality-of-the-circumstances when considering six key factors equally. While these factors are not exhaustive, they play a crucial role in determining whether a worker should be considered an independent contractor or an employee.  The DOL explained that the new rule brings the independent contractor analysis back into conformity with longstanding case law and the text of the FLSA.

Factors considered in the economic reality test are:

1. Opportunity for Profit or Loss Depending on Managerial Skill: Assesses “whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work.”  Facts that may be relevant to this factor are “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.”
2. Investments by the Worker and Potential Employer: Examines the investments made by both the worker and the potential employer in facilities, equipment, or other materials.  It would be appropriate to consider “whether any investments by a worker are capital or entrepreneurial in nature.”  Such investments are those that “generally support an independent business and 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.”
3. Degree of Permanence of the Work Relationship: Evaluates the anticipated duration of the working relationship between the worker and the potential employer.  “[T]he degree of permanence of the work relationship would ‘weigh[] in favor of the worker being an employee when the work relationship is indefinite in duration or continuous, which is often the case in exclusive working relationships”’ but would “weigh[] in favor of the worker being an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themselves and marketing their services or labor to multiple entities.”
4. Nature and Degree of Control: Analyzes the level of control exerted or able to be exerted by the potential employer over the work performed by the worker.  Control could include such things as scheduling, selecting projects, supervising work, limiting opportunities to work with others, the use of technology to supervise performance, and the “ability to set a price or rate for goods or services.”  The more control the potential employer has over the worker and the work performed, the more likely the worker is an employee.
5. The extent to Which the Work is an Integral Part of the Potential Employer’s Business: Considers how essential the services provided by the worker are to the potential employer’s core business.  The fact that work performed is “critical, necessary, or central to the employer’s principal business” supports a worker being an employee.
6. Skill and Initiative: Assesses “whether the worker uses specialized skills to perform the work and whether those skills contribute to the business-like initiative.”  “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 employer to perform the work.”

Consideration of all factors equally is crucial to ensure accurate and compliant classification of workers.  The DOL acknowledges that other factors may also be relevant in particular situations. Employers in the fields of construction, information technology, medical and health, creative, personal services, and retail are especially encouraged to review relationships with those providing services. Still, all employers are urged to stay informed about these changes, review their existing relationships with independent contractors, and make adjustments as necessary to align with the updated classification framework. 

A full copy of the final rule can be found here and additional guidance from the DOL can be found here.

Employers with questions about independent contractors or other questions regarding the employment relationship or changes to the law should contact Member Care at 509.777.2727 or membercare@aiin.com and speak with one of our HR professionals.