The Department of Labor (DOL) recently updated its rule on the proper classification of Independent Contractors. The new rule goes into effect on March 11, 2024.
Employee vs. Independent Contractor Classification
In hiring workers and contracting for services, employers must ensure that they are properly classifying workers as either employees or independent contractors. The Fair Labor Standards Act (FLSA) sets forth a number of protections for employees, including, but not limited to, minimum wage and overtime. The DOL has provided guidance and rules to assist employers in determining which of their workers qualify as “employees,” who are entitled to rights under the FLSA and other applicable laws. Employers cannot simply label workers as “independent contractors” to avoid employer obligations under those laws. Rather, employers must classify their workers in accordance with the DOL’s rules, and other applicable laws, or they run the risk of misclassifying employees and denying certain rights, which can introduce significant liability.
Prior Rule: 2021 IC Rule
Current law establishes that “independent contractors” are workers who, as a matter of “economic reality, are not economically dependent on an employer for work and are in business for themselves.” Courts and prior DOL guidance have implemented an “economic realities” test whereby employers consider a number of factors to analyze whether a worker is an employee or a true independent contractor. There have been several renditions and arrangements of these factors. In 2021, the DOL implemented a rule (2021 IC Rule), whereby the DOL identified the following five factors to guide the inquiry into a worker’s status as an independent contractor:
– The nature and degree of control over the work
– The worker’s opportunity for profit or loss
– The amount of skill required for the work,
– The degree of permanence of the working relationship between the worker and the potential employer
– Whether the work is part of an integrated unit of production.
The 2021 IC rule stated that the first two factors were the “core factors” that were the most probative and carried greater weight. Under the prior 2021 IC Rule, it was “highly unlikely” that the “three non-core factors could outweigh the combined probative value of the two core factors.”
New 2024 Rule
In its publication of the new rule that goes into effect on March 11, 2024 (2024 IC Rule), the DOL states that the 2021 IC Rule does not fully comport with the text and purpose of the FLSA. Specifically, the “two core factor” approach does not adequately represent a complete analysis of the “economic realities.” As a result, the 2024 IC Rule applies a six-factor test in which no single factor is determinative. The six factors are as follows:
– The extent to which the work performed is an integral part of the employer’s business.
– The worker’s opportunity for profit or loss based on their managerial skill.
– The extent of the relative investments of the employer and the worker.
– Whether the work performed requires special skills and initiative.
– The permanency of the relationship between the worker and the employer.
– The degree of control exercised or retained by the employer.
Most of the factors in the 2024 IC Rule were in some way addressed in the prior 2021 IC Rule. However, the 2024 IC Rule includes an additional factor for “the extent of relative investments of the employer and the worker.” The most significant difference is that the new rule returns to a “pre-2021” totality-of-the-circumstances economic reality test where no single factor or group of factors is assigned any predetermined weight. The new 2024 IC Rule also significantly differs in the following manners:
– Provides additional analysis of the control factor, including a detailed discussion of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the nature and degree of control over a worker;
– Returns to the DOL’s longstanding consideration of whether the work is integral to the employer’s business (rather than whether it is exclusively part of an “integrated unit of production”);
– Provides additional context to some factors, including a discussion of exclusivity in the context of the permanency factor and initiative in the context of the skill factor; and
– Omits a provision from the 2021 Independent Contractor Rule that minimized the relevance of an employer’s reserved but unexercised rights to control a worker.
Practical Implications
Ultimately, the 2024 IC Rule introduces a more complex and comprehensive classification analysis than what employers applied under the prior 2021 IC Rule. Employers will no longer be able to rely on the “two core” factors of “nature and degree of control” and “workers’ opportunity for profit and loss,” which introduces a bit more uncertainty in employers’ classification of their independent contractors. In response to the updates, employers should make necessary modifications to their classification of independent contractors and, if necessary, review their current relationships with independent contractors to ensure that they are properly classified.
Finally, employers should ensure that their classifications of independent contractors are also compliant with state law. For example, employers in California must not only comply with the 2024 IC Rule, but must also comply with California’s “ABC Test”, as established in AB5.
If you have any questions about the DOL’s new 2024 IC Rule, California’s ABC Test, or any other state law applicable to the classification of independent contractors, please contact your Kunzler, Bean & Adamson Attorneys.
Employee vs. Independent Contractor Classification
In hiring workers and contracting for services, employers must ensure that they are properly classifying workers as either employees or independent contractors. The Fair Labor Standards Act (FLSA) sets forth a number of protections for employees, including, but not limited to, minimum wage and overtime. The DOL has provided guidance and rules to assist employers in determining which of their workers qualify as “employees,” who are entitled to rights under the FLSA and other applicable laws. Employers cannot simply label workers as “independent contractors” to avoid employer obligations under those laws. Rather, employers must classify their workers in accordance with the DOL’s rules, and other applicable laws, or they run the risk of misclassifying employees and denying certain rights, which can introduce significant liability.
Prior Rule: 2021 IC Rule
Current law establishes that “independent contractors” are workers who, as a matter of “economic reality, are not economically dependent on an employer for work and are in business for themselves.” Courts and prior DOL guidance have implemented an “economic realities” test whereby employers consider a number of factors to analyze whether a worker is an employee or a true independent contractor. There have been several renditions and arrangements of these factors. In 2021, the DOL implemented a rule (2021 IC Rule), whereby the DOL identified the following five factors to guide the inquiry into a worker’s status as an independent contractor:
– The nature and degree of control over the work
– The worker’s opportunity for profit or loss
– The amount of skill required for the work,
– The degree of permanence of the working relationship between the worker and the potential employer
– Whether the work is part of an integrated unit of production.
The 2021 IC rule stated that the first two factors were the “core factors” that were the most probative and carried greater weight. Under the prior 2021 IC Rule, it was “highly unlikely” that the “three non-core factors could outweigh the combined probative value of the two core factors.”
New 2024 Rule
In its publication of the new rule that goes into effect on March 11, 2024 (2024 IC Rule), the DOL states that the 2021 IC Rule does not fully comport with the text and purpose of the FLSA. Specifically, the “two core factor” approach does not adequately represent a complete analysis of the “economic realities.” As a result, the 2024 IC Rule applies a six-factor test in which no single factor is determinative. The six factors are as follows:
– The extent to which the work performed is an integral part of the employer’s business.
– The worker’s opportunity for profit or loss based on their managerial skill.
– The extent of the relative investments of the employer and the worker.
– Whether the work performed requires special skills and initiative.
– The permanency of the relationship between the worker and the employer.
– The degree of control exercised or retained by the employer.
Most of the factors in the 2024 IC Rule were in some way addressed in the prior 2021 IC Rule. However, the 2024 IC Rule includes an additional factor for “the extent of relative investments of the employer and the worker.” The most significant difference is that the new rule returns to a “pre-2021” totality-of-the-circumstances economic reality test where no single factor or group of factors is assigned any predetermined weight. The new 2024 IC Rule also significantly differs in the following manners:
– Provides additional analysis of the control factor, including a detailed discussion of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the nature and degree of control over a worker;
– Returns to the DOL’s longstanding consideration of whether the work is integral to the employer’s business (rather than whether it is exclusively part of an “integrated unit of production”);
– Provides additional context to some factors, including a discussion of exclusivity in the context of the permanency factor and initiative in the context of the skill factor; and
– Omits a provision from the 2021 Independent Contractor Rule that minimized the relevance of an employer’s reserved but unexercised rights to control a worker.
Practical Implications
Ultimately, the 2024 IC Rule introduces a more complex and comprehensive classification analysis than what employers applied under the prior 2021 IC Rule. Employers will no longer be able to rely on the “two core” factors of “nature and degree of control” and “workers’ opportunity for profit and loss,” which introduces a bit more uncertainty in employers’ classification of their independent contractors. In response to the updates, employers should make necessary modifications to their classification of independent contractors and, if necessary, review their current relationships with independent contractors to ensure that they are properly classified.
Finally, employers should ensure that their classifications of independent contractors are also compliant with state law. For example, employers in California must not only comply with the 2024 IC Rule, but must also comply with California’s “ABC Test”, as established in AB5.
If you have any questions about the DOL’s new 2024 IC Rule, California’s ABC Test, or any other state law applicable to the classification of independent contractors, please contact your Kunzler, Bean & Adamson Attorneys.
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