12 January 2024 • 5 minute read
DOL releases final rule on independent contractor classification
On January 10, 2024, the US Department of Labor (DOL) published its final rule defining independent contractors under the Fair Labor Standards Act (FLSA). The final rule materially tracks the DOL’s October 2022 proposed rule.
Effective March 11, 2024, the final rule officially rescinds the Trump-era’s business-friendlier independent contractor rule in favor of a pro-employee rule that will make it more difficult for employers to classify workers as independent contractors.
It is anticipated that this new rule will have far-reaching implications for employers across all industries. Employers are encouraged to review their current service provider classifications while monitoring legal challenges to the new rule.
The DOL’s final rule makes it easier to classify workers as employees
The DOL’s final rule reinstates a multifactor “totality-of-the-circumstances” approach, whereby the propriety of a worker’s classification depends on “whether the worker is economically dependent on the potential employer for work.”
Among the factors to be considered are (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 over the working relationship, (5) extent to which the work performed is an integral part of the potential employer’s business, and (6) whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. According to the rule, additional factors may be considered if such factors “are relevant to the overall question of economic dependence.”
Departing from the prior rule’s weighted approach, which focused on two principal factors – the exercise of control over the worker and the worker’s opportunity for profit and loss – the DOL’s final rule provides that each of the six factors will carry equal weight and that no one factor will be dispositive in the determination of a worker’s classification. In so doing, the final rule effectively has shifted the applicable focus away from the parties’ actual practice, thereby making it easier for workers to be classified as employees notwithstanding the particular economic realities presented.
Employers face increased misclassification and liability risk
With its final rule, the DOL has nearly unfettered discretion to challenge the propriety of virtually any independent contractor relationship. Indeed, the application of the “totality-of-the-circumstances” test likely will create immediate challenges for many employers utilizing independent contractors, as some workers could be classified as employees – and would, in that case, be entitled to minimum wage and overtime protections, along with a wide range of employer-provided benefits (eg, health and welfare benefits, 401k and similar retirement plans).
It is expected that the DOL (with the assistance of the IRS, with which it has had a joint working and information-sharing relationship since the Obama-era focus on misclassification of workers) will initially target industries which are heavily reliant on subcontracting and/or services agreements, such as the hospitality, media, transportation, and manufacturing industries.
If and when the final rule takes effect, employers are also likely to face an increased risk of private misclassification claims, including as raised in collective actions, and the potential liabilities that accompany such claims, such as backpay, liquidated damages, and attorneys’ fees.
Importantly, this new test is applicable only to the federal FLSA and does not impact state-specific independent contractor tests applicable to state wage and hour claims.
The DOL’s final rule follows the NLRB’s release of its more stringent (and employee-friendly) independent contractor test in June 2023, which significantly increased the risk that more workers will be classified as employees covered by the National Labor Relations Act and subject to organizing efforts. It also follows the release of the NLRB’s joint employer rule, whereby secondary “employers” could be required to negotiate with a primary employer’s union-represented employees with respect to terms and conditions over which it is determined to have sufficient levels of “control.” Taken together, these agency rules point to even more risk for unionized employers.
Where do employers go from here?
Although it is anticipated that the DOL’s new rule will be challenged in litigation by various groups, including the US Chamber of Commerce, employers are encouraged to carefully review the factors discussed above and take proactive steps to mitigate increased misclassification risk.
For example, employers should consider auditing their independent contractor relationships, including contracts and services agreements, to determine the ongoing propriety of such relationships in view of the final rule. For any relationships that no longer meet the applicable standards, employers should consider the pros and cons of reclassifying such workers. Any such audits or reclassifications should be undertaken under the guidance and direction of legal counsel to ensure to the greatest extent possible that the audit is protected against disclosure by the attorney-client privilege.
Our team of dedicated labor and employment professionals has extensive experience in both classification issues and how best to minimize misclassification risks and related liabilities. If you would like to discuss any of these matters, please reach out to the authors or your DLA Piper relationship attorney.
Effective March 11, 2024, the final rule officially rescinds the Trump-era’s business-friendlier independent contractor rule in favor of a pro-employee rule that will make it more difficult for employers to classify workers as independent contractors.
It is anticipated that this new rule will have far-reaching implications for employers across all industries. Employers are encouraged to review their current service provider classifications while monitoring legal challenges to the new rule.
The DOL’s final rule makes it easier to classify workers as employees
The DOL’s final rule reinstates a multifactor “totality-of-the-circumstances” approach, whereby the propriety of a worker’s classification depends on “whether the worker is economically dependent on the potential employer for work.”
Among the factors to be considered are (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 over the working relationship, (5) extent to which the work performed is an integral part of the potential employer’s business, and (6) whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. According to the rule, additional factors may be considered if such factors “are relevant to the overall question of economic dependence.”
Departing from the prior rule’s weighted approach, which focused on two principal factors – the exercise of control over the worker and the worker’s opportunity for profit and loss – the DOL’s final rule provides that each of the six factors will carry equal weight and that no one factor will be dispositive in the determination of a worker’s classification. In so doing, the final rule effectively has shifted the applicable focus away from the parties’ actual practice, thereby making it easier for workers to be classified as employees notwithstanding the particular economic realities presented.
Employers face increased misclassification and liability risk
With its final rule, the DOL has nearly unfettered discretion to challenge the propriety of virtually any independent contractor relationship. Indeed, the application of the “totality-of-the-circumstances” test likely will create immediate challenges for many employers utilizing independent contractors, as some workers could be classified as employees – and would, in that case, be entitled to minimum wage and overtime protections, along with a wide range of employer-provided benefits (eg, health and welfare benefits, 401k and similar retirement plans).
It is expected that the DOL (with the assistance of the IRS, with which it has had a joint working and information-sharing relationship since the Obama-era focus on misclassification of workers) will initially target industries which are heavily reliant on subcontracting and/or services agreements, such as the hospitality, media, transportation, and manufacturing industries.
If and when the final rule takes effect, employers are also likely to face an increased risk of private misclassification claims, including as raised in collective actions, and the potential liabilities that accompany such claims, such as backpay, liquidated damages, and attorneys’ fees.
Importantly, this new test is applicable only to the federal FLSA and does not impact state-specific independent contractor tests applicable to state wage and hour claims.
The DOL’s final rule follows the NLRB’s release of its more stringent (and employee-friendly) independent contractor test in June 2023, which significantly increased the risk that more workers will be classified as employees covered by the National Labor Relations Act and subject to organizing efforts. It also follows the release of the NLRB’s joint employer rule, whereby secondary “employers” could be required to negotiate with a primary employer’s union-represented employees with respect to terms and conditions over which it is determined to have sufficient levels of “control.” Taken together, these agency rules point to even more risk for unionized employers.
Where do employers go from here?
Although it is anticipated that the DOL’s new rule will be challenged in litigation by various groups, including the US Chamber of Commerce, employers are encouraged to carefully review the factors discussed above and take proactive steps to mitigate increased misclassification risk.
For example, employers should consider auditing their independent contractor relationships, including contracts and services agreements, to determine the ongoing propriety of such relationships in view of the final rule. For any relationships that no longer meet the applicable standards, employers should consider the pros and cons of reclassifying such workers. Any such audits or reclassifications should be undertaken under the guidance and direction of legal counsel to ensure to the greatest extent possible that the audit is protected against disclosure by the attorney-client privilege.
Our team of dedicated labor and employment professionals has extensive experience in both classification issues and how best to minimize misclassification risks and related liabilities. If you would like to discuss any of these matters, please reach out to the authors or your DLA Piper relationship attorney.
