DOL Issues New Independent Contractor Rule

Way back in October 2022, the Department of Labor (DOL) proposed to change the test it uses to determine whether a worker is an independent contractor or an employee under the Fair Labor Standards Act (FLSA). The DOL has now published its new test which goes into effect on March 11, 2024. 

To determine whether a worker is an employee and covered by the FLSA’s overtime and minimum wage requirements, the DOL will not simply accept what an employer calls a worker. Instead, the DOL will dig into the “economic realities” of the relationship to determine whether the worker is economically dependent on the employer for work or whether the worker is in business for himself. Under the new rule, the DOL will balance the following factors: 

• Does the worker have the opportunity to earn a profit or suffer a loss based on her managerial skill, initiative, or business acumen/judgment? The DOL may consider: whether the worker determines or can negotiate the charge or pay for the work, accepts or declines jobs or chooses the order and/or time in which jobs are performed, engages in marketing, advertising, or other efforts to expand their business or secure more work, and makes decisions to hire others, purchase materials and equipment, or rent space. However, the decision to work more hours or take more jobs when paid a fixed rate per hour or per job, will not generally reflect the exercise of managerial skill needed for this factor. 
• Has the worker made capital or entrepreneurial investments which serve an independent business and a business-like function “such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach”? The DOL states: “[c]osts 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, are not evidence of capital or entrepreneurial investment and indicate employee status.” 
• What is the degree of permanence of the work relationship? A work relationship that is definite in duration, non-exclusive, project-based, or sporadic such that the worker is in business for herself and marketing her services to others is more likely to be an independent contractor relationship.  
• What is the nature and degree of the employer’s control? The more control the employer exerts or can exert over the worker and the work, the more likely it is that the worker is an employee. 
• Is the function performed by the worker an integral part of the employer’s business? A worker is more likely to be an independent contractor if the work she performs is not critical, necessary, or central to the employer’s principal business. 
• Does the worker use specialized skills to perform the work and do those skills contribute to business-like initiative? The DOL explains: “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 will consider the “totality of the circumstances” here, and no factor will be given a predetermined or controlling weight. Additional factors may also be relevant to the analysis. 

It is possible that there will be legal challenges to the new test which, as you can see, is clearly onerous to meet. The U.S. Chamber of Commerce has already voiced its opposition to the new rule and is “considering all options, including litigation.”

In the meantime, however, if you use independent contractors, we encourage you to review the DOL’s FAQs on the new test. Because misclassification can lead to significant liability, we encourage any employer using or considering using independent contractors to consult with qualified counsel. KZA attorneys are always available to help you understand the analysis and evaluate your workers. 

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.