Department of Labor Publishes Final Rule on Independent Contractors

January 17, 2024

Jordan Jeter - Tonkon Torp LLP

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The U.S. Department of Labor has published its final rule on how to determine whether a worker is an independent contractor or an employee under the Fair Labor Standards Act (FLSA). The rule is effective March 11, 2024, and it rescinds the department’s 2021 independent contractor rule.

The 2021 rule – a rule that was born from the Trump Administration – was generally seen as a business-friendly approach to the independent contractor standard. The rule elevated two “core” factors above all others in the worker classification analysis – namely, the nature and degree of control over the relevant work, and an individual’s opportunity for profit or loss. The remaining factors were less probative. After taking office, the Biden Administration delayed the 2021 rule before withdrawing it, an action which was challenged in court resulting in the reinstatement of the 2021 rule. The new 2024 rule explicitly rescinds the 2021 rule.

According to the department, the new rule provides guidance on proper classification and seeks to combat employee misclassification, which the department describes as a “serious problem that impacts workers’ rights to minimum wage and overtime pay, facilitates wage theft, allows some employers to undercut their law-abiding competition and hurts the economy at-large.” Given that commentary, it is evident that the new rule will reinforce the department’s pro-employee view of worker classification.

Consistent with the department’s longstanding emphasis on the “economic realities” of the relationship between a worker and potential employer, the new rule restores the multifactor analysis that courts used for decades prior to the 2021 rule.

The six non-determinative and non-exhaustive factors include:

1. The worker’s opportunity for profit or loss;
2. The financial stake and nature of any resources a worker has invested in the work;
3. The degree of permanence of the work relationship;
4. The degree of control an employer has over the person’s work;
5. Whether the work the person does is essential to the employer’s business; and
6. Consideration of the worker’s skill and initiative.

The rule further allows for the consideration of additional factors relevant to the overall question of economic dependence. At the end of the day, “economic dependence is the ultimate inquiry for determining whether a worker is an independent contractor or an employee.” Said another way, an independent contractor, like any business owner, may profit or may suffer a loss from a job – if the work is done incorrectly or inefficiently, the independent contractor may lose money, unlike an employee.

The impact that the new rule will have is unclear. The department’s authority is limited to how to define an independent contractor under the FLSA. Although courts often give deference to an agency’s interpretation of the law, the level of that deference is a question before the U.S. Supreme Court this term. And, federal courts have decades of case law to guide their independent contractor analysis. For state laws and other federal employment laws, the analysis remains unchanged by this new independent contractor rule.

For FLSA claims before the department, however, the practical result of the new rule will be that workers are now more likely to be classified as employees rather than independent contractors. With more factors, all of which are non-determinative and non-exhaustive, there will be more ambiguity about whether a worker is an independent contractor. And, with ambiguity, we are likely to see the department exercise their enforcement discretion in favor of classifying workers as employees.

As employers know, the risk of misclassifying a worker as an independent contractor carries steep liabilities, as laws like the FLSA, which governs minimum wage among other things, apply only to employees and not independent contractors. Employers must, therefore, carefully review their relationships with workers and independent contractor agreements.

As a refresher for Oregon employers, three tests guide the state interpretation of what workers can be classified as independent contractors.

Employers with questions about the classifications of their workers should reach out to their employment counsel.

This update is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have questions about the issues raised here, please contact any of the attorneys in our Labor & Employment Practice Group, or the attorney with whom you normally consult.

About Tonkon Torp
Tonkon Torp LLP is a leading business and litigation law firm serving public companies, substantial private enterprises, entrepreneurial businesses, and individuals throughout the Northwest. For more information, visit tonkon.com.