Department of Labor Releases Final Independent Contractor Rule

On January 10, 2024, the United States Department of Labor published its final rule on the classification of workers as employees or independent contractors under the Fair Labor Standards Act (FLSA). The new rule, scheduled to take effect on March 11, 2024, was released following years of litigation under various employment laws over worker classification. However, rather than end the litigation, this new rule is expected to meet further resistance from members of the business community. While the rule may seek to rein in gig economy employers such as ride share companies, its effects will be seen across the business spectrum, including the energy sector.

The DOL’s stated intent is to “address[] how to determine whether a worker is properly classified as an employee or independent contractor under [FLSA].” Because FLSA does not apply to independent contractors, the test established by DOL is critical for businesses across the United States.

According to the new rule’s Executive Summary, since the 1940s, the DOL and the courts have applied the “economic reality test” to categorize a worker as either an employee or an independent contractor. To that end, the rule defines independent contractors as “workers who, as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves. Such workers play an important role in the economy[.]”

The economic reality test consists of six factors:

    1. The 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.

Under the Trump administration’s January 2021 rule, five total factors were considered, two of which were considered highly probative “core factors.” Those two core factors were (i) the nature and degree of control over the work, and (ii) the worker’s opportunity for profit and loss. The new rule argues that this prioritization went against judicial precedent on the subject of interpreting FLSA for this purpose. Now all factors hold equal weight. The new rule’s executive summary argues that it is “return[ing] to a totality-of-the-circumstances analysis of the economic reality test,” which gives equal weight to all factors and breaks investment out as its own, sixth factor.

The published rule contains 106 pages of history and explanation for the how and why of each factor. Gordon Arata will continue to monitor the path of this new rule in order to advise clients and mitigate adverse impacts to your business.

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