Now that the rule-making process, including the public notice and comment period, is completed, at long last we can say with certainty that effective March 11, 2024, the Department of Labor (DOL) will rescind its prior 2021 Independent Contractor Rule and replace it with a new pronouncement designed to give employers a purportedly more streamlined rule for determining who is and who is not an independent contractor. In doing so, the DOL has gone back in time to a less employer-friendly, and allegedly more worker-oriented, independent contractor rule.
DOL investigators will tell you they are neutral on the employer/employee relationship and their sole job is to uphold the law and standards of the Fair Labor Standards Act (FLSA). This must all be looked at without naiveté. The DOL routinely espouses that many people are incorrectly classified as independent contractors when they should be classified as employees. The “new” Rule may make it harder for employers to designate contractors as non-employees thereby opening up more employers to charges of employee misclassification. The DOL estimates this Rule change could convert up to Six Million laborers previously classified as independent contractors into W-4 employees.
The new Rule showcases the Biden Administration DOL’s deep distrust of the use of independent contractor classifications as an employer’s ruse to not pay workers fairly by avoiding payment of employee benefits and overtime wages. This new Rule is expected to hit small businesses the hardest. The federal Small Business Administration (SBA) in its comments to the DOL during the notice and comment period pointed out that “many independent contractors or freelance workers, who may also be small businesses, believe they will lose work because of this rule.” The DOL rebuked the SBA’s assessment and refused SBA’s suggested changes. When paired with the DOL’s other pending rule change to increase the minimum salary level for exempt employees, it’s easy to see why so many labor and employment practitioners envision a forthcoming spike in overtime wages liability for employers of all sizes.
The new independent contractor Rule reverts back to a “totality-of-the-circumstances” analysis as part of the economic reality test. In plain English that means the inquiry will now focus on whether the independent contractor depends (solely) on the employer for their livelihood or whether they are in business for themselves.
Economic reality factors under the new Rule include:
- The worker’s opportunity for profit or loss.
- Investments by the worker and the potential employer are to be comparable. The worker’s investment in their business must be more than just tools, it must be important (significant) relative to the size of their business and that of the employer.
- Degree of permanence of the work relationship. If the job is for a set period of time, then an independent contractor relationship is more likely to exist than if the relationship is indefinite in duration, continuous, or exclusive of work for other employers.
- Nature and degree of control by employer over worker. The more control, the less chance a worker is really an independent contractor.
- The extent to which the work performed is an integral part of the employer’s business. This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the employer’s principal business. Compare a cleaning crew that comes in at night and cleans a widget factory to a crew who comes into the same widget factory to help make widgets. The cleaning crew has a much better shot at being independent contractors then the so-called contractors who make the widgets, the item that is integral to what the company sells.
- Skill and initiative. To be an independent contractor, the worker must use specialized skills to perform the work and use business owner type initiative in the relationship.
- Additional factors. This is the undefined catch-all section that will develop through the inevitable litigation that will follow.
At the end of the day, using the new Rule as a guide, employers must primarily concentrate on assessing whether the worker in question is in business for themselves, is free to take other jobs, and rules their own destiny. If so, they are likely to be adjudged to be independent contractors. If not, they are likely to be found by the DOL to be employees entitled to all rights and obligations that go along with it. Employers that use independent contractors as part of their operations should use the time remaining before the final Rule takes effect and collaborate with legal counsel to evaluate all independent contractor relationships to confirm they meet this economic realities test.