New Federal Rule on Independent Contractor Status

The following blog is reposted from Kinetic Law.

On January 2, 2024, the US Department of Labor (DOL) issued a new rule for determining when a worker should be classified as an independent contractor, rather than an employee, for purposes of the minimum wage, overtime, and other provisions of the Fair Labor Standards Act (FLSA). The new rule takes effect on March 11.

Prior to this new rule, the determination of independent contractor status was based on a body of rulings by judges in various cases over decades. According to the DOL, the new rule is intended to comply with that body of case law, rather than change it.

The new rule establishes a six-factor “economic reality” test, to determine whether a worker is economically dependent on the employer for work (meaning, the worker should be treated as an employee), or whether the worker is in business for himself or herself (meaning, the worker is an independent contractor. These six factors and the relevant considerations for each are:

1. Opportunity for profit or loss depending on managerial skill

   1. Does the worker determine or can the worker meaningfully negotiate the charge or pay for the work?

   2. Can the worker accept or decline jobs?

   3. Whether the worker chooses the order and/or time in which jobs are performed?

   4. Whether the worker engages in marketing/advertising to expand its business?

   5. Takeaway: workers who behave more like their own managers are more likely to be classified as independent contractors

2. Investments by the worker and the potential employer

   1. Do the worker and the potential employer make similar types of investments in their respective businesses, such as those which increase the worker’s ability to do different types of or more work, reduce costs, or extend market reach

   2. This should be considered on a relative basis – the worker may make such investments on a smaller scale than the potential employer, due to a smaller business size

   3. Takeaway: workers who make these types of investments, even if on a smaller scale, are more likely to be classified as independent contractors

3. Degree of permanence of the work relationship

   1. Is the work indefinite, continuous, or exclusive of work for other employers?

   2. Note that many employees have second or third jobs for economic reasons, while many contractors may choose to work for a single person or entity for various reasons, so exclusivity should be considered in light of the other factors in this test

   3. Takeaway: work that is more indefinite/continuous in nature, especially when coupled with exclusivity, means that the worker is more likely to be classified as an employee

4. Nature and degree of control

   1. Does the potential employer set the worker’s schedule?

   2. Does the potential employer supervise performance of the work?

   3. Does the potential employer reserve the right to supervise or discipline the worker?

   4. This kind of supervision/control does not include actions for the sole purpose of complying with specific laws or regulations, such as prohibiting driving while intoxicated or requiring construction workers to wear hard hats as required by city ordinances.

   5. Takeaway: the more control and supervision exercised by the potential employer, the more likely the worker will be classified as an employee

5. Extent to which the work performed is an integral part of the business

   1. This focuses on whether the job performed is critical, necessary, or central to the business. For example, if the employer’s primary business is software design, the workers who design the software are performing work that is integral to the business. On the other hand, if the business is a law firm, a worker involved in designing a website for the firm is not performing work central to the business

   2. Takeaway: workers who perform work that is central to the business are more likely to be considered employees, rather than independent contractors.

6. Skill and initiative

   1. Does the worker use specialized skills to perform the work and also in connection with initiatives to promote the worker’s own business?

   2. Does the worker depend on training from the potential employer to perform the work?

   3. Takeaway: if the worker does not use specialized skills both to perform the work and to promote the worker’s own business or if the worker depends on the potential employer for training, it is more likely the worker is an employee.

Additional factors can be considered on a case-by-case basis, if they indicate whether the worker is in business for herself, rather than economically dependent on the potential employer for work.

As mentioned above, this new rule does not change existing laws or guidelines. However, it can provide more clarity and guidance to companies in determining how to classify workers. Finally, companies should also pay attention to state employment laws – particularly the 28 states that have adopted the more stringent ABC test, and the 8 states that use a variation of the ABC test. In California, for example, the “B” in the ABC test requires that the worker perform work that is outside the employer’s usual course of business, in order to be classified as a contractor. If the worker is performing work that is within the employer’s usual course of business (i.e., software design for a software company, driving a truck for a package delivery company), then the worker is an employee.