DOL Issues Final Independent Contractor Rule
On January 9, 2024, the U.S. Department of Labor issued its final rule governing the standard for determining independent contractor status. The rule will be published in the Federal Register on January 10, and take effect 90 days later, on March 11, 2024.
The final rule issued by the DOL rescinds the rule promulgated in 2021 during the Trump administration, which focused on “core factors” (the nature and degree of control exercised by the contracting party over the work and the opportunity for profit and loss enjoyed by the individual doing the work) as largely determinative of the independent contractor status. The Trump era-rule, as we explained in a September 2020 article, would have made it easier to achieve independent contractor status.
The DOL maintains that the six-factor “totality of the circumstances” rule that replaced the Trump-era rule, where no one factor is given particular weight, is a better means to make the determination of who is and who is not an independent contractor. The final rule tracks the six factors identified in the proposed rule with very minor modifications (noted in red).
- Opportunity for profit or loss based on managerialskill. The DOL says the opportunity to make more money by working more hours or taking more jobs when the worker is paid a fixed rate per hour or job normally is not the sort of opportunity for profit reflective of managerial skill. Instead, the DOL suggests the following as possibly relevant: “whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.”
- Investments by the worker and the employer. The DOL states that this factor focuses on whether the overall investments by the worker are made to support their own independent business and serve a business-like function, such as to take on different types or more work, extend market reach or reduce costs. “Costs to a worker of tools and equipment to perform a specific job, costs of workers’ labor, and costs that the potential employer imposes unilaterally on the worker, for example, are not evidence of capital or entrepreneurial investment and indicate employee status.” The DOL suggests that another consideration is the worker’s investments overall in their business relative to the overall investments by the “employer” According to the proposed rule, “The worker’s investments need not be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of investments or the sizes of the worker and the potential employer. Instead, the focus should be on comparing the investments to determine whether the worker is making similar types of investments as the potential employer (even if on a smaller scale) to suggest that the worker is operating independently, which would indicate independent contractor status.”
- Degree of Permanence of the Working Relationship. The DOL offers that relationships that are indefinite or ongoing, often involving exclusive relationships, weigh in favor of employee, notindependent contractor status. By contrast, relationships that are definite in nature, project based, sporadic, or nonexclusive, look more like independent ones (except where the sporadic nature of work is based on the nature of the business where the work is performed). The DOL concedes that regularly occurring, fixed periods of work may be carried out by independent contractors but adds that this would not be the case if it is due to the seasonal or temporary nature of the work itself. On the other hand, “where a lack of permanence is due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ, this factor is not necessarily indicative of independent contractor status unless the worker is exercising their own independent business initiative.”
- Nature and Degree of Control. This factor looks at whether an employer exerts control, including reserved control, over the performance and the economic aspects of the working relationship. Setting the schedule of work, supervising work (including technological supervision by means of a device or electronically) and specifically demanding exclusivity by the worker in servicing the employer are indicia of control. Reserving the right to discipline the worker or make supervisory visits to a worker may exert control by virtue of the possibility of these outcomes, even when not actually exerted. So too is placing demands on the worker’s time that do not allow them to work for others when they choose (even where a contract with the worker allows them to do so). Control over the price for the work and marketing of the worker’s service also is relevant. If controlled by the worker, the factor favors independent status but not if by the employer. However, the DOL concedes that imposing standards based solely on legal obligations, health and safety requirements, or customer or contractual service standards is not control that undermines independent contractor status. On the other hand, standards that go beyond compliance with external laws and, “instead serve the potential employer’s own compliance methods, safety, quality control, or contractual or customer service standards may be indicative of control.”
- Extent to which the work performed is an integral part of the “employer’s” business. Workers who perform a function that is integral to the business (i.e. critical, necessary or central to the employer’s principal business) are more likely to be employees. Those who do not perform such functions are more likely independent.
- Skill and Initiative. The DOL states that this factor focuses on whether the worker uses specialized skill to perform the work, and whether that skill contributes to business-like initiative. In the final rule, the DOL clarified, “Where the worker brings specialized skills to the work relationship, this fact is not itself indicative of independent contractor status because both employees and independent contractors may be skilled workers. It is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.”
The DOL’s rule does not constitute an interpretation that is binding on courts, because the agency does not have authority to establish binding rules or regulations. It does, however, establish the standards the DOL will use to enforce the law and make determinations as to whether a worker has been misclassified as an independent contractor. It also may be relied upon by courts as guidance from the agency that is deemed expert in this area.
A finding of misclassification has far-reaching effects for all involved, including potential employer liability for failure to withhold payroll taxes, remit workers’ contribution payments, meet minimum wage and overtime requirements, among other laws. Additionally, Federal employment laws, including those governing discrimination and the entitlement to employee benefits, apply to employees and not independent contractors, creating another potential area of liability.
Although there likely will be legal challenges to the rule, employers should not assume the challenges will be successful. Accordingly, employers should review their independent contractor relationships against this new standard with their employment counsel.