DOL's Independent Contractor Rule updates

The Congressional Research Service recently issued an update to the U.S. Department of Labor’s 2024 Independent Contractor Rule. In January, the department identified criteria for how it classifies whether a worker is an employee or independent contractor for purposes of the Fair Labor Standards Act.

“Accurate employee classification is important, because the rights and protections afforded by the FLSA are available only to employees and not to independent contractors,” the update said. “Misclassifying an individual as an independent contractor may result in not only financial loss for the individual but potential loss in tax revenues for federal and state governments.“

The Labor Department contends that the new rule will provide uniform guidance to employers and is better aligned with judicial precedent that has interpreted the FLSA. Critics counter that the new rule may discourage the use of contract workers and will force companies to review their current contractor relationships to ensure they have properly classified their workers to avoid possible noncompliance.

The rule implemented in January listed six factors for evaluating the economic reality of a work relationship:

• The worker’s opportunity for profit or loss;
• Investments by the worker and the potential employer;
• The degree of permanence of the work relationship;
• The nature and degree of the potential employer’s control over the worker;
• The extent to which the work performed is an integral part of the potential employer’s business; and
• Whether the worker uses specialized skills to perform the work and whether those skills contribute to businesslike initiative.

“According to the agency, consideration of these factors will help to establish whether a worker is economically dependent on an employer for work and thus should be classified as an employee under the FLSA,” the update said. “The rule states that the six factors are not exhaustive and that additional factors may be relevant if they `in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.’”

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Since publication, freelance workers and others have filed lawsuits challenging the rule. These legal challenges currently are in the early stages of litigation.

“Whether the new rule will result in more workers being classified as employees is not entirely certain,” the Congressional Research Service said. “The rule’s six factors generally resemble those that have been considered by federal courts when making determinations about employee status. Nevertheless, some argue that the rule could have a notable impact on companies, such as those in the gig economy, that rely on the services provided by independent contractors.”