DOL issues much-anticipated new independent contractor classification rule

The U.S. Department of Labor (DOL) issued a final rule regarding Independent Contractor Classification under the Fair Labor Standards Act (FLSA) aimed at reducing “the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.”

The new rule rescinds the prior 2021 rule, under the previous presidential administration, which established a more business-friendly approach to the independent contractor classification standard. The old rule considered only five factors with a focus on two of them:

• The nature and degree of control an employer had over a worker’s work.
• The individual’s opportunity for profit or loss.

The three factors with less weight were the degree of permanence of the work relationship, the amount of skill and initiative, and whether work performed was integral to the employer’s business.

Effective on March 11, employer should ensure they are using the economic realities test when determining a worker’s classification and applying equal weight to all six factors (outlined below); taking a closer look at the degree of control they have over workers classified as independent contractors; the exclusivity of the working relationship with such individuals; and the independent initiative involved for the worker. Most importantly, employers should re-evaluate employees to ensure they are all properly classified and make the necessary changes if needed.

Correct worker classification under the FLSA is important because businesses and organizations, that misclassify workers as independent contractors rather than as employees, risk liability for minimum wage and overtime claims.

The new rule should at least be arguably more employee-friendly, providing greater opportunities for findings of an employment relationship under the new six factors. As a result, it appears likely that employers will face an increased number of misclassification claims going forward.

The new rule marks a return to the original six-factor analysis that utilizes a “totality of the circumstances” approach with no one factor carrying more weight than any other. The six factors to be considered when determining if an individual is properly classified as an employee or independent contractor now include:

1. Opportunity for profit or loss depending on managerial skill;
2. Investments by the worker and the employer;
3. Degree of permanence of the work relationship;
4. Nature and degree of control over the worker;
5. Whether work performed is integral to the employer’s business; and
6. Skill and initiative of the worker.

There are key differences from the 2021 rule.

This revision includes additional analysis specific to the degree of control factor, exclusivity in the context of the permanency factor, and initiative in the context of the skill factor. The rule also now includes analysis of whether the work is integral to the employer’s business rather than whether it is exclusively part of an “integrated unit of production.”

Finally, the final rule omits a provision that previously minimized the relevance of an employer’s reserved but unexercised rights to control a worker.

Related: Here’s how to understand and help gig workers

Employers should specifically note that the new rule contains a revision that specifically says, “actions taken by the potential employer for the sole purpose of complying with a specific, applicable federal, state, tribal, or local law or regulation are not indicative of control.” This applies to the degree of control factor and specifically outlines that if an employer takes specific actions for the sole purpose of complying with law, those actions cannot be used to support a finding that the employer exercises sufficient control over a worker to establish an employment relationship.

Overall, the changes provide more consistency between the analysis the majority of courts have already applied. This allows for increased reliance on the analysis, and the DOL maintains there will be increased clarity and more streamlined processes for organizations to follow to avoid worker misclassification issues.

Spencer Fane attorney Tiffany Santhavi Watts helps employers resolve employment disputes in and out of the courtroom.