DOL’s New Rule for Categorizing Independent Contractors
Recently, the Department of Labor (DOL) published its final rule for evaluating independent contractor classifications under the Fair Labor Standards Act, replacing its 2021 rule. While the 2021 rule focused primarily on the right to control the worker and the worker’s opportunity for profit and loss, the new rule uses six factors to assess the “economic realities” of the relationship in determining whether a worker should be a contractor or an employee. This new rule will be effective March 11, 2024, though it is likely to be challenged in the courts.
Six Factor Test
The new rule uses six, non-exhaustive factors in evaluating the totality of the circumstances. The six factors are:
- Opportunity for profit or loss – For this factor, the determination focuses on who has the ability to do things like choose assignments, solicit work, negotiate contracts, advertise services, and reduce costs, as these are managerial skills that owners of a business use to affect profit and loss.
- Investments by the worker and the potential employer – For this factor, the determination involves what costs the worker takes on to perform the job, such as purchasing tools and equipment, as these types of capital and entrepreneurial investments are typically done by independent businesses, not employees.
- The degree of permanence of the work relationship – This factor examines the duration and exclusivity of the working arrangement, as indefinite and exclusive working relationships are more typical of employee situations.
- Nature and degree of control – Consistent with previous interpretations, this factor depends on the potential employer’s degree of control, including reserved control, over the performance of the work and the economic aspects of the relationship, as the more control there is, the more likely it is that the worker is an employee.
- The extent to which the work performed is an integral part of the employer’s business – This factor considers whether the work is “critical, necessary, or central to the employer’s principal business,” as work on such integral functions is usually reserved for employees.
- Skill and initiative – Finally, this factor focuses on whether the worker uses specialized skills to perform the work, as more specialized skills support a contractor designation.
Employers should carefully review their independent contractor use in light of the new rule. If you have any questions about this or other workforce issues, please contact one of Honigman’s Labor and Employment attorneys here.