Independent Contractor Classification: Out with the New and Back in with the Old Thumbnail

Independent Contractor Classification: Out with the New and Back in with the Old

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On January 9, 2024, the Department of Labor (the “DOL”) announced its final rule defining “independent contractors” under the Fair Labor Standards Act (the “FLSA”).  Displacing the 2021 two-factor Trump Administration rule, the Biden Administration’s Final Rule returns to the “totality of the circumstances” test.

As we know, the FLSA provides that nonexempt employees must earn minimum wage and overtime. Independent contractors, of course, are not afforded these and other protections under the FLSA.  Unfortunately, the FLSA – passed in 1938 – fails to define the term independent contractor, which has necessitated rules promulgated by the various politically-appointed Departments of Labor since that time.

The Trump Administration sought to streamline the process of classifying workers as employees vs. independent contractors in 2021, giving greater weight to two main factors: (1) control; and (2) opportunity for profit or loss.  If both of these factors weighed in favor of the same classification, then in theory, the worker classification analysis need not proceed further.  However, if the factors split, then three remaining factors would be considered: (1) the amount of skill required for the work, (2) the degree of permanence of the relationship, and (3) whether the work is part of an integrated unit of production. Those three individual factors, however, were not intended to outweigh the factors of control and opportunity for profit or loss.

Shortly after taking office, and four days before the Trump Administration’s rule took effect, President Biden’s Administration’s Department of Labor published a rule delaying the effective date, and on May 6, 2021, published a rule withdrawing the 2021 Rule.  Legal proceedings ensued, after which the Biden Administration undertook new rulemaking on October 13, 2022, which became final on January 9, 2024.

The Final Rule re-establishes the multifactor, totality-of-the-circumstances test, aligning with decades of (varying) judicial precedent analyzing worker classifications. The Final Rule outlines six main factors for analysis, to be weighed equally: (1) the opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the potential employer; (3) the degree of permanence of the work relationship; (4) the nature and degree of control; (5) the extent to which the work performed is an integral part of the potential employer’s business; and (6) the skill and initiative of the worker.  As previously, the DOL leaves open the door for additional factors demonstrating that a worker is in the business for him or herself.

Outside of the Final Rule’s departure from the previous two-core factor analysis, two other changes from the 2021 Rule are noteworthy: first, the DOL’s re-establishment of “investments by the worker and the potential employer” as a separate factor; and second, required analysis as to whether the work performed is an integral part of a potential employer’s business (as opposed to the 2021 Rule’s “integral part of unit production”). Both changes broaden the scope of relevant facts in determining a worker’s status, with the stated goal of determining “whether the worker is economically dependent on the potential employer for work or is in business for themself.”

The Final Rule becomes effective on March 11, 2024. In the meantime, businesses of all sizes should review their independent contractor relationships and consult with a Frantz Ward attorney if questions remain. Full text of the Final Rule and accompanying Executive Summary can be found here.

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