On Jan. 9, the U.S. Department of Labor’s Wage and Hour Division announced the final rule on Employee or Independent Contractor Classification Under the Fair Labor Standards Act, which rescinds the ABC-supported 2021 final rule and replaces it with a confusing multifactor analysis to determine whether a worker is an employee or an independent contractor. The final rule takes effect on March 11, 2024.

Immediately following the release of the rule, ABC issued the following statement from Ben Brubeck, vice president of regulatory, labor and state affairs:

“By undermining the flexible, independent work for millions of Americans, President Joe Biden’s DOL is choosing to move forward with a final rule that creates an ambiguous and difficult-to-interpret standard for determining independent contractor status. Under the rule’s multifactor test, employers will now be forced to guess which factors should be given the greatest weight in making the determination. Instead of promoting much-needed economic growth and protecting legitimate independent contractors, the final rule will result in more confusion and expensive, time-consuming, unnecessary and often frivolous litigation, as both employers and workers will not understand who qualifies as an independent contractor.

“Regrettably, the confusion and uncertainty resulting from the final rule will cause workers who have long been properly classified as independent contractors in the construction industry to lose opportunities for work. Legitimate independent contractors are a vital part of the construction industry, providing specialized skills, entrepreneurial opportunities and stability during fluctuations of work common to the industry. They play an important role for large and small contractors, delivering construction projects safely, on time and on budget for their government and private customers. This move will jeopardize the ability of construction firms to continue the industry’s longstanding practice of utilizing legitimate independent contractors.”

The DOL issued FAQs, which discuss provisions of the final rule, including:

7. What analysis guides whether a worker is an employee or independent contractor under this final rule?

This final rule continues to affirm that a worker is not an independent contractor if they are, as matter of economic reality, economically dependent on an employer for work. Consistent with judicial precedent and the Department’s interpretive guidance prior to 2021, the final rule applies the following six factors to analyze employee or independent contractor status under the FLSA:

(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 final rule provides detailed guidance regarding the application of each of these six factors. No factor or set of factors among this list of six has a predetermined weight, and additional factors may be relevant if such factors in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work (i.e., an employee under the FLSA).

10. How does the final rule differ from the Department’s 2021 Independent Contractor Rule?

This final rule differs from the guidance provided in the 2021 Independent Contractor Rule in several important ways. Specifically, consistent with the approach taken by federal courts, this final rule:

• Returns to a totality-of-the-circumstances economic reality test, where no single factor or group of factors is assigned any predetermined weight;
• Considers six factors (instead of five), including the investments made by the worker and the potential employer;
• Provides additional analysis of the control factor, including a detailed discussion of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the nature and degree of control over a worker;
• Returns to the Department’s longstanding consideration of whether the work is integral to the employer’s business (rather than whether it is exclusively part of an “integrated unit of production”);
• Provides additional context to some factors, including a discussion of exclusivity in the context of the permanency factor and initiative in the context of the skill factor; and
• Omits a provision from the 2021 Independent Contractor Rule which minimized the relevance of an employer’s reserved but unexercised rights to control a worker.

To learn more about the final rule, read the DOL’s FAQs. and an analysis from ABC’s general counsel, Littler Mendelson.

ABC staff are continuing to analyze the 339-page final rule and will be offering a webinar for members in the near future. Continue to monitor Newsline for updates.

Background:

ABC strongly supported the 2021 final rule, which simplifies and clarifies the factors for determining when a worker is an independent contractor versus an employee under the FLSA. The Biden DOL froze and then rescinded the 2021 rule over the opposition of ABC and other industry associations.

In March 2021, ABC, its Southeast Texas chapter and the Coalition for Workforce Innovation filed suit against the DOL, which remains pending. In March 2022, the U.S. District Court for the Eastern District of Texas dealt a blow to the Biden administration’s efforts to delay and rescind the 2021 independent contractor final rule in that case. Under a decision applauded by ABC, the ABC-supported rule went into effect as scheduled on March 8, 2021.

In October 2022, the DOL announced a new proposed rule to rescind and replace the 2021 final rule and ABC submitted comments in opposition on Dec. 13. The DOL received approximately 55,400 comments in response to the proposed rule.