Independent Contractor Rule Will Take Effect March 11

Author: Michael Cardman, HR & Compliance Center Senior Legal Editor

January 9, 2024

The US Department of Labor (DOL) today released a final rule that will establish an economic realities test for determining whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA).

The rule takes effect 60 days from tomorrow, on March 11.

The new worker-friendly standard will replace the more business-friendly five-factor test put in place by the Trump administration in 2021.

Legally speaking, the new rule is not especially significant. For one thing, it's the courts, not regulatory agencies like the DOL, that have the final say over who qualifies as an independent contractor. Moreover, the DOL's rule is limited to only one law - the FLSA. There are different tests for independent contractor status under several other federal statutes, including the Employee Retirement Income Security Act (ERISA), the National Labor Relations Act (NLRA) and the Internal Revenue Code. Furthermore, each state has its own set of laws governing independent contractor classification.

Nevertheless, the 2024 rule may have a significant practical impact by inspiring lawsuits, according to Richard Reibstein, co-head of Locke Lord LLP's independent contractor compliance and misclassification law practice. In a blog post, he predicted that the rule "will give renewed impetus to disaffected workers classified as independent contractors to file class actions seeking minimum wage, overtime payments, and employee benefits under applicable laws."

What's in the Rule

Under the new rule, six factors will be used to "guide an assessment of the economic realities of the working relationship and the question of economic dependence":

In addition, the DOL will consider any other factors that in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the employer for work.

Changes From the 2022 NPRM

The DOL made several adjustments to the draft version of the rule proposed in 2022 based on the roughly 55,000 public comments it received, as well as feedback provided by stakeholders at public forums around the country.

The most significant change involves the "nature and degree of control" factor. Under the 2022 draft, any control exercised by a potential employer would have been seen as weighing in favor of an employer-employee relationship even if it was done to comply with legal obligations. Under the 2024 rule, actions taken by a potential employer to comply with a specific law or regulation do not indicate an employer-employee relationship - as long as those actions were taken for the sole purpose of complying and do not serve the potential employer's own ends.

For example, if a home care agency requires all individuals who come into contact with patients to undergo a criminal background check in compliance with a specific Medicaid regulation, that would not indicate an employer-employee relationship. Conversely, if a home care agency sets out extensive worker qualifications, such as comprehensive training requirements that go beyond the training required for relevant licenses, that might weigh in favor of an employer-employee relationship.

Another important change concerns the "investments by the worker and the potential employer" factor. The 2022 draft rule said that the worker's investments should be considered on a relative basis with the employer's investments in its overall business. The 2024 final rule clarifies that investments should be compared not only in terms of dollar value or size of the investments, but also on whether the worker is making similar types of investments as the employer (albeit on a smaller scale) that would suggest that the worker is operating independently. In addition, the DOL added a clause recognizing that costs that are "unilaterally imposed" by a potential employer do not weigh in favor employee status.

Business groups are expected to try to stop the new rule.

In 2021, after the Biden administration repealed the Trump administration's five-factor rule, a coalition of businesses representing staffing agencies, direct sellers, gig economy platforms and others sued the DOL to reinstate the Trump rule. A federal district court granted their wish in 2022.

Nevertheless, Solicitor of Labor Seema Nanda said the DOL is confident it can defeat any lawsuit. "We have very carefully considered the relevant case law under the [FLSA] in developing the rule and are certainly prepared to defend the rule if there are any challenges," she said in a conference call yesterday.