The Department of Labor released its final independent contractor rule which will make it much more difficult to classify workers as contractors. The rule takes effect March 11, 2024.
Why it matters: Employers will need to take a hard look at their contingent workforces and may need to reclassify many contractors as full-time employees, or reevaluate their use of contingent workers in general. Failure to do so could result in significant legal and litigation expense, not only under the FLSA, but under other state and federal employment laws.
The bottom line: The final rule’s lack of clarity regarding who qualifies as an independent contractor creates significant uncertainty for employers acting in good faith to comply. The Association submitted comments in opposition to the proposed rule, arguing that it was overly broad and vague.
Multi-factor “economic realities” test for independent contractor status: The final rule establishes a new (albeit familiar) test for independent contractor status based on six non-exhaustive factors:
- Opportunity for profit and loss;
- Investment by the worker and employer;
- The degree of permanence of the working relationship;
- The nature or degree of control;
- The extent to which the work is integral to the employer’s business; and
- The degree of skill and initiative the worker exhibits.
The rule also states that any additional factors may be used by the Department but declines to provide more specifics.
Employers left in the dark: The six factors in the rule are vaguely defined and few examples of their potential application are provided. Employers are largely left guessing whether their classification decisions will comply with the new rule. Further, even if the classification was correct under the six factors, per the rule, the Department could use any additional unnamed factor to determine that the worker was classified incorrectly.
It’s not the ABC test...right? The Department goes out of its way to explain that its new rule is not the infamously strict ABC test used by California and other jurisdictions. Despite the difference in form, in practice, the DOL’s new rule may be just as problematic for employers, given how some of the test factors are defined. For example:
- Reserved control over a worker – such as compliance with legal or safety obligations – could be indicative of employee status.
- A worker’s lack of a permanent or indefinite relationship with an employer is not necessarily indicative of contractor status.
- The use of personal equipment or vehicles is not necessarily indicative of contractor status.
Next steps for employers:
- Coordinate with your legal teams to audit the extent of contingent worker usage and its necessity.
- Review classifications to ensure they will comply with the new rule.
- Review contracts with staffing providers to clarify degrees of control within the relationship.
Outlook: As noted above, the final rule is effective beginning March 11, 2024 unless it is blocked by expected legal challenges by the business community. However, employers should not rely on any such result and begin preparing for compliance now.
