Independent Contractors Revisited: Frequently Asked Questions About the Department of Labor’s New Final Rule for Worker Classification

From JDSupra, Winthrop & Weinstine, P.A. published an excellent article with frequently asked questions and answers. This is one of the best summaries on the new rule that I’ve seen. Winthrop & Weinstine, P.A. write:

On January 10, 2024, the U.S. Department of Labor (DOL) published its final rule changing its existing test to determine whether a worker is an independent contractor or an employee under the Fair Labor Standards Act (FLSA). The new rule largely rescinds the more employer-friendly five-factor test issued under the Trump Administration, reverting back to a six-factor test similar to the one historically employed by courts and the DOL.

The final rule goes into effect on March 11, 2024 and is largely consistent with the DOL’s similar proposed rule from 2021. Generally speaking, the new rule is more pro-employee than the Trump Administration’s 2021 rule.

Question: What does the new 2024 rule say?

Answer:  The final rule will equally consider the following factors to determine whether an individual is properly classified as an independent contractor:

  1. The opportunity for profit or loss depending on managerial skill;
  2. Investments by the worker and potential employer;
  3. The degree of permanence of the work relationship;
  4. The nature and degree of employer’s control over performance of the work and working relationship;
  5. The extent to which the work performed is an integral part of an employer’s business; and
  6. The skill and initiative of the worker.

This marks a return to what is known as a “totality of the circumstances” approach.

Question: What did the prior rule say?

Answer: The prior rule prioritized two key factors above all others. The two key factors were: 1) the nature and degree of control over the relevant work; and 2) an individual’s opportunity for profit or loss. Many viewed the prioritization of the two key factors to weigh in favor of employers. The additional factors included: 3) the amount of skill required for the work; 4) the degree of permanence of the working relationship; and 5) whether the work is part of an integrated unit of production.

Question: What changed from the old rule to the new 2024 rule?

Answer: The new rule adds back the sixth factor and gives all factors equal weight. The two key factors listed in the 2021 rule were de-emphasized, giving equal consideration to all listed factors. The sixth factor — investments by the worker and potential employer — was added back into the rule.

Question: Is the new rule binding authority?

Answer: No, but it is highly persuasive. While not binding, courts regularly cite DOL interpretive rules as persuasive authority in determinations of whether workers qualify as independent contractors (instead of employees), at least under the FLSA. Since there is no universal, binding test, DOL rules provide centralized federal guidance and should be carefully considered by employers in classifying their workers.

Question: Are there consequences if an employee is misclassified as an independent contractor?

Answer: Yes. Under the Fair Labor Standards Act (FLSA), workers classified as employees are owed minimum wage and overtime pay, and damages can be liquidated (or doubled). In addition, Employers must pay federal, state, and local income taxes; social security and Medicare taxes; unemployment insurance taxes, and workers’ compensation insurance taxes. Misclassification can be extremely costly for employers given additional penalties and interest, plus any taxes owed.

Question: Does this rule change impact other considerations?

Answer: Yes. Worker classification also affects employer requirements for employees in areas of insurance, discrimination, family and sick leave, retirement plans, and more. Some applicable federal statutes that apply to employees include:

  • Affordable Care Act,
  • Title VII of the Civil Rights Act of 1964,
  • Equal Pay Act,
  • Age Discrimination in Employment Act,
  • Americans with Disabilities Amendments Act,
  • Genetic Information Nondiscrimination Act,
  • Uniformed Services Employment and Reemployment Rights Act,
  • Occupational Safety and Health Act,
  • Worker Adjustment and Retraining Notification Act,
  • Family and Medical Leave Act,
  • Employee Retirement Income Security Act,
  • National Labor Relations Act,
  • And more.

The new DOL rule focuses specifically on worker classification under the FLSA. However, since worker classification is a topic with wide-reaching implications, courts are likely to at least consider the new DOL rule in contexts beyond the FLSA. This also depends on jurisdiction because different courts have their own established precedent for worker classification.

Question: Are there any pending legal challenges to the new rule?

Answer: Yes. There are currently three pending cases to date.   First, a a Texas federal district court is considering whether the DOL complied with procedural requirements in the Administrative Procedure Act for publishing and rescinding final rules. The court could potentially delay the rule’s effective date until after the 2024 presidential elections. Second, a Georgia federal district case involves a group of freelance writers arguing the new rule will force them into unwanted traditional employment. Third, a Louisiana federal district case involves an independent trucking business claiming it cannot operate under increased labor costs caused by worker reclassification under the new rule.

Each of these cases aims to prevent the new rule from taking effect. That said, as it currently stands, the rule is still scheduled to take effect on March 11, 2024. In addition, Congress has the power to repeal the rule within 60 days of publication, though this rarely occurs. Realistically, it is likely this rule will take full effect on March 11, 2024.

Question: What should I do in response to the new rule?

Answer: Employers should review their current and any new independent contractor classifications to ensure compliance with the new six-factor test as well as any applicable state law. 

Source: Independent Contractors Revisited: Frequently Asked Questions About the Department of Labor’s New Final Rule for Worker Classification | Winthrop & Weinstine, P.A. – JDSupra

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