Quick Hits

• The DOL announced the new final rule addressing worker classification under the FLSA.
• In addition to the six-factor test, the new rule allows for the consideration of additional factors relevant to the overall question of economic dependence,
• The new rule goes into effect on March 11, 2024.

The 2021 Rule

The DOL issued the prior iteration of the worker classification rule in January of 2021. That version sought to elevate two “core” factors in the worker classification analysis—(1) the nature and degree of control over the relevant work and (2) an individual’s opportunity for profit or loss. In addition, the 2021 rule sought to relegate three remaining factors—(1) the amount of skill required for the work; (2) the degree of permanence of the working relationship; and (3) whether the work is part of an integrated unit of production—as less probative. This was viewed as a business-friendly approach to the independent contractor standard.

The 2024 Rule

Through its 2022 proposed rule, the DOL took direct aim at this 2021 streamlined approach and prioritization of key factors and sought to repeal the 2021 rule and return to the six-factor analysis that examines the totality of circumstances of the relationship (a standard that has long been used by the courts). The 2024 rule does just that with only minor variations, despite the DOL’s receipt of more than 55,000 comments in the interim.

Under the 2024 rule, the DOL returns to the six-factor test, with no one factor presumed to carry more weight than another. These factors are:

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 control over performance of the work and working relationship;
5. The extent to which the work performed is an integral part of the potential employer’s business; and
6. The skill and initiative of the worker.

The 2024 rule now allows for the consideration of additional factors relevant to the overall question of economic dependence. In addition, the 2024 rule differs only slightly from the DOL’s 2022 proposal in its application of these factors. Most notably, for purposes of the nature and degree of control factor, the 2024 rule views actions taken for purposes of compliance with laws and regulations as evidence of control unless performed for the “sole purpose of compliance.” In other words, as the 2024 rule makes clear, these actions cannot “go beyond compliance with a specific … law or regulation.” Where that line is drawn, however, may not always be clear, particularly given that many laws impose a dual obligation on behalf of the company and independent contractor alike to comply. Companies in highly regulated industries can expect to see this portion of the rule cited in misclassification challenges in the future.

In addition to doing away with the prioritizing of certain factors over others, the new rule also reframes the “integral part of the business” factor to equate “integral” with work “critical, necessary, or central” to the company’s principal business. This is a significant change that shifts the focus of the analysis to whether the business function the worker performs is integral or important rather than whether the individual worker is integral to the organization. Facts that may be relevant under this new test include whether workers can set or negotiate the rate for services they provide and workers’ ability to work elsewhere. 

Key Takeaways

According to the DOL, the 2024 rule is intended to “reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.”

While not controlling, the 2024 rule will inevitably be cited as persuasive authority for federal courts considering classification issues, offering the DOL’s current (and more pro-employee) interpretation of prior court decisions on the subject. At the end of the day, existing case law continues to control, as it is courts—and not regulatory agencies—that create binding precedent law.

The 2024 rule reinforces the DOL’s pro-employee view of worker classification and may create classification complications for companies reliant on independent contractors as well as workers participating in the gig economy, potentially adding fodder to an active area of litigation and administrative enforcement. With the benefit of the DOL’s current worker classification analysis, employers may want to evaluate their existing and future worker relationships and independent contractor agreements and make necessary changes as needed.