In our prior article, the details of the new test for determining who is an employee and who is an independent contractor was laid out click here. As of last week, that rule is effective. Now clients are asking how we got here and what comes next. Here are our thoughts.
Effective March 11, 2024, a new rule by the Department of Labor (the “DOL”) will reshape how it classifies employees and independent contractors under the Fair Labor Standards Act (the “FLSA”). The new rule, which was just announced in January, identifies six equally weighted factors to be considered by federal courts when classifying workers. The move will rescind the DOL’s 2021 rule (the “2021 Rule”) and reinstate a revised multifactor approach that had been used by the federal courts for decades.
Background on FLSA and the Pre-2021 Test
The FLSA mandates minimum wage and overtime pay for employees; however, it excludes independent contractors from its protections. Therefore, independent contractors are not entitled to overtime, among other things. This is one reason companies want to use independent contractors when possible.
Before 2021, federal courts utilized multifactor tests, focused on economic dependence and business autonomy, to determine whether workers should be classified as employees or independent contractors. The specific factors used varied slightly based on which circuit heard the matter. However, for the most part, each test would look at the following basic questions/factors:
- Did the worker have opportunity for profit or loss;
- What was the amount of investment in the business by the worker;
- How permanent was the working relationship;
- What extent of control did the business have over the worker;
- Was the work an “integral part” of the business; and
- How much skill and initiative was required to do the worker’s job.
In this format, courts would not typically assign any specific weight to any factor, and would rather look at the “totality of the circumstances.”
The 2021 Rule
Prior to 2021, the DOL had, with few exceptions, issued only informal guidance on how to classify workers as employees or independent contractors; choosing instead to allow the federal courts to develop their own analysis. However, all of this changed on January 7, 2021, when the DOL issued its first rule to determine which workers should be considered employees versus independent contractors.
The 2021 Rule prioritized two “core factors;” (1) the nature and degree of the worker’s control over the work and (2) the worker’s opportunity for profit or loss based on initiative, investment, or both.
The 2021 Rule was designed and implemented by the Trump Administration. As soon as Biden took office, the DOL delayed its implementation and ultimately withdrew the rule. Because of a series of legal challenges and uncertainty, few courts actually followed the 2021 Rule and its “core factor” test.
The 2024 Rule
Starting last week, March 11, 2024, the DOL will use a new rule which introduces six equally weighted factors, aiming for a more comprehensive assessment. The six equally-weighted factors include:
(1) opportunity for profit or loss depending on managerial skill;
(2) investments by the worker and the potential employer;
(3) degree of permanence of the work relationship;
(4) nature and degree of control;
(5) extent to which the work performed is an integral part of the potential employer’s business; and
(6) skill and initiative.
The DOL would have each of the six factors considered “in view of the economic reality of the whole activity.” Additionally, the DOL contemplates there may be additional factors that “may be relevant” to a thorough analysis.
Please see our new Independent Contractor Checklist (click here) when classifying workers as independent contractors.
Conclusion
The 2024 Rule essentially codifies the multifactor test which federal courts have been following for years. By codifying the test we see the DOL sending a clear message to businesses: if a worker is dependent upon you for his livelihood even if she has significant autonomy over her day-to-day activities then she should be classified as an employee. As such we believe until more case history is established following this new rule employers would be wise to err on the side of classifying workers as employees. But, if Biden loses in November, we may see a return to the core factor test in 2025! Stay tuned!
Brody and Associates regularly advises management on complying with the latest local, state, and federal employment laws. If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.454.0560.