The New DOL Independent Contractor Rule.

On January 10, 2024, the U.S. Department of Labor (DOL) published a final rule regarding independent contractor status that will rescind the 2021 rule and implement guidance meant to be more consistent with the Fair Labor Standards Act (FLSA). The new DOL independent contractor rule goes into effect on March 11, 2024, and significantly departs from the test that was previously used to evaluate whether someone is an independent contractor. Rather, it uses a “six-factor” economic realities test to determine whether a worker is an independent contractor or qualifies as an employee.

What is the New DOL Independent Contractor Rule?

Failure to correctly classify a worker can result in serious repercussions for an employer. However, it can sometimes be unclear whether a worker should be classified as an employee — or an independent contractor. Critically, the DOL believed the 2021 independent contractor rule did not fully comport with the FLSA, as interpreted by the courts. It adopted a new independent contractor rule that replaces the previous guidance with a multi-factor test to reduce the risk of employee misclassification.

What is the Analysis Used in the New DOL Independent Contractor Rule?

The 2021 independent contractor rule set forth by the DOL focused on two primary factors — a worker’s control over their work and their opportunity for profit or loss. In contrast, the new DOL independent contractor rule seeks to reduce the risk of misclassification of employees by focusing on six factors to analyze a worker’s status. In sum, the updated rule specifies that independent contractors, as a matter of economic reality, are in business for themselves — rather than be economically dependent on an employer.

The factors that must be evaluated under the new DOL independent contractor rule include the following:

1. The Worker’s Opportunity for Profit or Loss

This factor considers whether the worker exercises managerial skills that would impact their success or failure in performing the work. The DOL’s rule considers a number of elements when evaluating this factor, including whether the worker does any of the following:

  • Determines or can negotiate their pay
  • Chooses their jobs and the time in which they are performed
  • Engages in marketing or advertising to secure more work
  • Makes decisions to hire others
  • Purchases materials or rents space

If a worker has no opportunity for a profit or loss, they are an employee. While some decisions can affect the amount of pay a worker receives (such as whether they work overtime), this generally does not have an impact on the exercise of managerial skill that indicates independent contractor status.

2. Investments Made by the Worker and Potential Employer

This factor under the new DOL independent contractor rule considers whether the worker made any investments that are capital or entrepreneurial in nature. It looks specifically at whether a worker made investments that would serve a business-like function and suggests they are operating independently. However, it’s essential to understand that if an employer unilaterally imposes the cost of tools on a worker, it doesn’t necessarily mean they are an independent contractor.

3. The Degree of Permanence of the Working Relationship

A worker is more likely to be classified as an employee if the work relationship is continuous and indefinite in duration — or they are excluded from working for other employers. But if the work relationship is project based, non-exclusive, or limited in its duration, it may suggest that the worker is in business for themselves.

4. The Degree and Nature of a Potential Employer’s Control Over the Work

This factor considers the potential employer’s control over the worker’s schedule, supervision over the performance of the work, and whether they limit the worker’s ability to work for others. Other relevant facts in this analysis can include whether the employer uses technology to supervise the work, reserves the right to discipline workers, and places restrictions on workers.

5. The Extent the Work Performed is Integral to the Employer’s Business Operations

Under the new DOL independent contractor rule, this factor considers whether the function the worker performs is an integral part of the business. If the work is critical, necessary, or central to the potential employer’s business operations, this factor weighs in favor of a worker being classified as an employee.

6. Skill and Initiative

If a worker brings special skills to their job, it does not necessarily mean they are an independent contractor. However, under the new DOL independent contractor rule, if a worker uses specialized skills “in connection with a business-like initiative,” it may be indicative that they are an independent contractor.

The above factors should be analyzed based on the totality of the circumstances. No one factor is dispositive in analyzing whether a worker should be classified as an independent contractor or an employee. Employers must be mindful to evaluate each of the six factors on a case-by-case basis.

Contact an Experienced Labor and Employment Law Attorney

Employee misclassification can result in serious legal consequences and monetary penalties for an employer. If you are an employer, it’s crucial to have a knowledgeable labor and employment law attorney by your side who can help you ensure compliance with the new DOL independent contractor rule — and protect your interests if legal issues arise.

With offices in Tulsa and Claremore, the employment law attorneys at Titus Hillis Reynolds Love represent employers in both state and federal court throughout the United States for a wide variety of employment matters, including those involving employee misclassification. For more information about our legal services, contact us online or call (918) 216-0892.