On March 11, 2024, the U.S. Department of Labor’s much anticipated rule under the Fair Labor Standards Act regarding the classification of workers as either employees or independent contractors officially came into effect. However, there are several pending lawsuits in different states seeking to prohibit the implementation of the new DOL rule. Nonetheless, companies should stay informed on the new rule and reassess their worker classification policies.
What Is Different About This Rule?
Prior to 2021, the DOL utilized a “totality-of-the-circumstances” test, consisting of six factors, which was focused on the “economic realities” of the worker’s situation to determine employee or independent contractor classifications. In 2021, the DOL streamlined the test by examining independent contractor classification based on two “core factors:” (1) the nature and degree of the individual’s control over the work; and (2) the individual’s opportunity for profit or loss. Under this test, workers were more likely to be deemed independent contractors than under the prior “economic realities” standard.
Assessing Independent Contractor Status Under the “Totality-Of-The-Circumstances” Test
The new rule re-adopts the traditionally used “Totality-Of-The-Circumstances” Test, in which the following six factors, when viewed holistically, determine whether a worker is classified as an employee or independent contractor:
- Opportunity for profit or loss depending on managerial skill
A worker is more likely to be classified as an employee when they have no opportunity for profit or loss, regardless of managerial skill. Additional items to consider include:
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- Whether the worker determines or can meaningfully negotiate the charge or pay for the work provided
- Whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed
- Whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work.
- Whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space
- Investments by the worker and the potential employer
Entrepreneurial investments indicate independent contractor status when the investments “generally support an independent business and serve a business-like function.” On the contrary, costs that are unilaterally imposed by an employer cannot be an investment if the worker has no meaningful input on the amount or imposition of the cost.
- Degree of permanence of the work relationship
This factor weighs in favor of employee classification when the relationship is indefinite in duration, continuous, or exclusive of work for other companies. On the other hand, it leans towards independent contractor classification when the work relationship is definite in duration, non-exclusive, project-based, or sporadic.
- Nature and degree of control
The more control a potential employer exercises over the worker, the more likely this factor will favor employee classification. The less control the potential employer exercises over the worker, the more likely this factor will favor independent contractor classification. However, the DOL declined to modify the regulation to require “substantial control” given that a heightened requirement is not supported by case law and the totality of the circumstances must be considered. The following aspects of control are relevant, but not exhaustive, in assessing common aspects of control: (a) scheduling; (b) supervision; (c) setting a price or rate for goods or services; and (d) ability to work for others.
- Extent to which the work performed is an integral part of the potential employer’s business
This factor focuses on whether a worker is economically dependent on the potential employer or in business for themself. Employee classification is more likely when the work performed is critical, necessary, or central to the potential employer’s principal business.
- Skill and initiative
This factor indicates employee classification when the worker does not use specialized skills in performing the work or is dependent on training from the potential employer to perform the work. On the other hand, a worker’s use of specialized skills in connection with a business-like initiative indicates that the worker is an independent contractor.
Why Does Classification Matter?
A worker classified as an employee is awarded certain protections under the FLSA not available to independent contractors. In addition, misclassified independent contractors can expose employers to significant potential liability.
What Should Companies Do?
Given the new rule, employers should consult counsel to assess any current and future independent contractor arrangements with this new six-factor test in mind. Both companies who hire independent contractors as well as companies who act as independent contractors should consider performing a worker classification audit, review, and revision to ensure the existing contractor agreements fall within the new DOL framework.
The law presumes every worker is an employee and the employer bears the burden of overcoming that presumption for an independent contractor classification. However, federal and state courts may use other independent contractor standards. For more information on the classification of workers applicable to your specific case, please contact Foley Mansfield for your employment needs.
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