The Department of Labor Issues New Final Rule for Independent Contractor Classification
On January 10, 2024, the U.S. Department of Labor (“DOL”) published its final rule that revises its guidance regarding the standard for assessing whether a worker is an employee or independent contractor under the Fair Labor Standards Act (“FLSA”). The final rule rescinds the DOL’s previous final rule that was published at the end of President Trump’s term of office in January 2021. As we previously reported in the wake of the issuance of the Department of Labor’s October 13, 2022 proposed rule, the final rule returns to a totality-of-the-circumstances analysis akin to the “Economic Reality Test.” This new final rule ultimately has the effect of making it more difficult to classify workers as independent contractors. The new final rule goes into effect on March 11, 2024.
The Final Rule
The final rule, which applies to workers in any industry, sets forth six equally-applied factors for assessing whether a worker is an employee or independent contractor: (1) opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the potential employer; (3) degree of permanence of the work relationship; (4) nature and degree of control; (5) extent to which the work performed is an integral part of the potential employer’s business; and (6) skill and initiative. This standard will be applied under the FLSA regardless of whether a worker wishes and agrees to be classified as an independent contractor because workers, who otherwise qualify as employees under this final rule, are barred from voluntarily waiving employee status. The DOL states such waiver “would harm other employees and undermine the Act’s goal of eliminating unfair methods of competition and commerce.”
The DOL touts its updated final rule as “more consistent with the FLSA as interpreted by longstanding judicial precedent,” and states it will “reduce the risk that employees are misclassified as independent contractors, while at the same time providing greater consistency for businesses that engage (or wish to engage) with individuals who are in business for themselves.”
This updated final rule marks the culmination of the DOL’s withdrawal of the Trump-era independent contractor rule that occurred shortly after President Biden was sworn into office in January 2021. The Trump-era rule created a tiered factor analysis. The first tier, which contained two “core” factors—the worker’s nature and degree of control and the worker’s opportunity for profit and loss—was outcome-determinative and most probative in the analysis. The second tier contained three “non-core” factors: (1) the skill required for the job; (2) the degree of permanence of the working relationship between the worker and employer; and (3) whether the work was part of an integrated unit of production. It was highly unlikely that these three non-core factors could skew the analysis in favor of one classification over the other.
Implications for Employers
The DOL’s updated final rule has serious implications for employers, especially those who relied on the previous final rule issued at the end of President Trump’s term of office. The updated final rule skews in favor of classifying workers as employees over independent contractors, and the misclassification of employees as independent contractors can carry significant liability under the FLSA, including unpaid minimum wages, overtime, liquidated damages, and attorneys’ fees and costs. While this final rule is facing multiple legal challenges, employers subject to the FLSA should heed this change to the classification standard given the potential liability. Additionally, while the DOL’s final rule constitutes a significant shift in the classification analysis under the FLSA, this rule does not affect state employee classification standards, such as the ABC test under California law. Employers would be well-served to consult with their labor and employment counsel regarding their classification practices given the new final rule under the FLSA, the variety of classification standards applied by state governments, and the potential for substantial class action liability for worker misclassification.
