New Rule for Independent Contractor Classification

• The Department of Labor has issued new guidelines for employers to determine whether a worker is an independent contractor vs. an employee.
• The new Rule requires employers to consider six factors when determining.
• The Rule is currently facing challenges and would result in many more workers being classified as employees, subjecting them to the provisions under the Fair Labor Standards Act for minimum wage, overtime compensation, and other protections.
• Misclassifying employees as independent contractors can potentially result in severe penalties to employers.

On January 10, 2024, the U.S. Department of Labor (DOL) issued a final rule regarding employee or independent contractor classification under the Fair Labor Standards Act (FLSA), which is set to take effect on March 11, 2024. Workers classified as employees receive certain protections under the FLSA, including minimum wage, overtime compensation, and other benefits, while independent contractors generally do not. The DOL has stated that the new Rule will increase the number of workers who fall under the protections of the FLSA as employees. This necessarily translates into increased costs for employers, who may pass them along to their customers and workforce in various ways.

In addition to these costs, other issues may arise in the context of employer liability for the acts and omissions of employees and other types of liability associated with employee versus independent contractor status. In addition to the costs of these benefits to employers, certain workers may appreciate the benefits associated with making their schedules and choosing when, where, and how they will perform work.   Employers and workers benefit from certainty and consistency regarding the classification of workers. Unfortunately, the new Rule may prove to have a chilling effect on employers who work with independent contractors out of fear that they may be held liable for employment taxes, workers’ compensation insurance, and other costs in the event that the worker is held to be an employee and not an independent contractor.

The 2024 independent contractor rule makes several changes to the 2021 rule, making it much more likely that a worker would be classified as an employee, not an independent contractor. For example, whereas the 2021 rule focused on a five-factor test, including two “core factors,” including a) the nature and degree of control over the work and b) the workers’ opportunity for profit or loss, the new 2024 rule mandates that employers must consider six individual “non-exhaustive” factors. The Factors are described as all having equal weight in a “totality of the circumstances” analysis of whether a worker is to be classified as an employee or an independent contractor. However, as the Rule clarifies, other non-enumerated factors may be considered.

The six factors include:

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.

However, the new Rule set to take effect in less than two months already faces many legal challenges. On January 16, 2024, a group of freelancers filed suit in the Northern District of Georgia seeking a preliminary injunction of the Rule and a declaratory judgment setting the Rule aside. This is in addition to ongoing litigation in the Fifth Circuit challenging the Rule’s compliance with the Administrative Procedures Act and public statements from members of Congress who have vowed to repeal the Rule. It is likely that the new Rule will continue to face challenges and may even be placed on hold. For now, however, employers doing business with independent contractors should assess whether these workers might meet the new test for independent contractor status. Employers should also consult with an attorney when it may be unclear whether they have correctly classified their employees.

The main opposition to the new Rule rests with allegations that the new Rule proposes a set of factors as a test for independent contractor status that would allow DOL and other enforcement entities to classify almost any worker as an employee and not as an independent contractor. In support of these challenges, lawmakers cite the history of a similarly enacted provision in California, which still faces legal challenges. California’s Assembly Bill 5 (A.B. 5), enacted in 2019, originally proposed a similarly narrow definition of an independent contractor. The law was amended almost immediately to accommodate “gig” workers as independent contractors—delivery drivers, personal transportation workers, etc. Issues remain as to the Rule’s impact on the trucking industry, where some drivers have operated as independent contractors for many decades. The matter is still being litigated, as a three-judge panel of the federal Ninth Circuit Court reversed the dismissal by the lower District Court in December of 2023 on grounds of Equal Protection and preliminary injunction standards. Plaintiffs have argued that the exemptions provided to some sectors of the economy but not others violate the California law’s stated purpose.

In the case of the DOL Rule, there is a long history of controversy in the DOL’s attempt to enact a new rule in 2021, which was struck down. In 2020, the DOL issued a rule outlining the factors to be analyzed for employers to determine whether a worker should be classified as an employee or an independent contractor, which was to take effect in 2021 (the “2021 Rule”). However, in March 2021, the DOL published an additional rule delaying the effective date of the 2021 rule, and in May 2021, the DOL published another rule withdrawing the 2021 independent contractor rule. These actions were subsequently challenged, and a Federal District Court issued a decision vacating both the delay and the withdrawal rules issued by the DOL. The District Court ordered the original Rule to take effect on March 8, 2021, as the effective date. In response, the DOL published a new rule to replace the 2021 rule, which is set to take effect in March 2024.

This non-exhaustive factor approach emphasizes that where a worker is dependent upon an individual employer for continued work, it is likely that the worker does not meet the test to be classified as an independent contractor. Until the Courts or Congress address the many challenges to the new Rule, the situation remains fluid until March 2024. We will be publishing any updates as necessary. If you have questions regarding whether your workers should be classified as independent contractors or employees, the attorneys at PS&E are here to help. Don’t hesitate to contact Kristina Curry at kcurry@pselaw.com or (937) 223-1130.