The Department of Labor (DOL) began 2024 by announcing a new rule for analyzing independent contractor status under the Fair Labor Standards Act.
Whether or not a worker is considered an employee determines that worker’s right to minimum wage, overtime pay, and other baseline benefits statutorily guaranteed to those classified as “employees” under the act.
The DOL states that the aim of the new rule is to combat employee misclassification and to provide guidance for both employers and workers on the issue. In the DOL news release, Acting Secretary of Labor Julie Su explained that the rule seeks to “help protect workers especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.”
Return to the Six-Factor Test
While the DOL independent contractor rule is new, the test itself is not. The new final rule marks a return to the six-factor test long utilized by courts in years past, and rescinds the previous five-factor test outlined in a prior rule finalized in 2021 under the Trump administration.
The six factors are:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the potential employer;
- Degree of permanence of the work relationship;
- Nature and degree of control;
- Extent to which the work performed is an integral part of the potential employer’s business; and
- Skill and initiative.
The practical effect of the new rule is to restrict the definition of “independent contractors,” meaning that companies will be unable to treat certain workers as independent contractors. This means better wage guarantees for workers now classified as employees, but also rising costs to employers.
According to a study cited by Reuters, employees can cost up to 30% more than contractors. This is again a marked departure from the Trump-era regulation, which made it easier to classify certain employees as independent contractor.
ABC, Other Impacted Industry Groups Oppose DOL Rule
The rule takes effect on March 11, 2024, but will undoubtedly face a bevy of legal challenges, as a number of prominent business groups oppose the rule (Reuters). The DOL received more than 50,000 comments on the October 2023 proposal.
The rule will pose legal difficulties for employers across the economy, but industries that rely heavily on contract-based work, such as construction, gig-based work, and trucking, will be particularly affected. In fact, groups such as the Flex Association (representing Uber, Lyft, and other gig economy companies), Associated Builders and Contractors (ABC) have opposed the rule and have said so publicly.
In a publicly-issued statement by the ABC, Ben Brubeck, ABC’s Vice Present of Regulatory, Labor and State Affairs, stated that the new rule will bring confusion and uncertainty, rather than clarity, to the issue, explaining:
“By undermining the flexible, independent work for millions of Americans, President Joe Biden’s DOL is choosing to move forward with a final rule that creates an ambiguous and difficult-to-interpret standard for determining independent contractor status. Under the rule’s multifactor test, employers will now be forced to guess which factors should be given the greatest weight in making the determination. Instead of promoting much-needed economic growth and protecting legitimate independent contractors, the final rule will result in more confusion and expensive, time-consuming, unnecessary, and often frivolous litigation, as both employers and workers will not understand who qualifies as an independent contractor.
“Regrettably, the confusion and uncertainty resulting from the final rule will cause workers who have long been properly classified as independent contractors in the construction industry to lose opportunities for work. Legitimate independent contractors are a vital part of the construction industry, providing specialized skills, entrepreneurial opportunities, and stability during fluctuations of work common to the industry. They play an important role for large and small contractors, delivering construction projects safely, on time and on budget for their government and private customers. This move will jeopardize the ability of construction firms to continue the industry’s longstanding practice of utilizing legitimate independent contractors.”
Conclusion and Takeaways
The DOL’s new rule underscores the ongoing efforts to create a more transparent and equitable framework for determining employment classifications. Traditionally, with any change in policy a certain degree of unpredictability is sure to follow.
Employers and workers alike must pay close attention to the specific criteria outlined in the test, adapting their practices to ensure compliance with the latest guidelines. In doing so, both parties contribute to a fair and just work environment that reflects the diverse and dynamic nature of today's labor market.
About Our Authors
Michael MacHarg is a member of the Adams and Reese Labor and Employment practice team with the Litigation Practice Group. He assists clients in labor relations and litigation, and with union avoidance, collective bargaining, contract administration, unfair labor practices, grievance and arbitration, wage and hour issues, and discrimination. Additionally, he has extensive experience related to workplace safety and health issues including compliance, audits, and citation defense.
Hogan Crosby is a member of the Adams and Reese Labor and Employment practice team with the Litigation Practice Group. He also represents corporate clients in general insurance defense. Crosby received his J.D. from Tulane University School of Law, and he is a graduate of Rhodes College, with a B.A. in Commerce and Business, a concentration in Finance, and a minor in History. Crosby formerly worked in the financial services industry, obtaining a FINRA Series 7 license and Colorado life accident and health insurance licenses.