The U.S. Department of Labor (DOL) released a final rule Jan. 9 that changes the criteria for classifying independent contractors.
The final rule largely mirrors the DOL’s proposed rule and requires companies to weigh a variety of economic factors to determine whether a worker is an employee or an independent contractor. The final rule will take effect on March 11.
SHRM asserted in public comments on the DOL proposed rule that the proposal would create uncertainty and confusion for employers. Additionally, SHRM stated that applying the proposed test would demand more time and resources from businesses. SHRM added that the proposed changes to the regulations would undermine workers’ ability to work independently.
Acting Secretary of Labor Julie Su, in a press briefing on Jan. 8, stated, “We’re ensuring workers receive the protections they need while also leveling the playing field for employers.” She emphasized that when businesses misclassify workers, it’s unfair to their law-abiding competitors. Bloomberg reports that Su has been renominated by President Joe Biden to be labor secretary after her nomination did not pass the Senate last year.
The DOL final rule significantly impacts the gig economy. App-based platforms typically classify their delivery drivers and other gig workers as independent contractors. Similarly, freelance workers, consultants, or individuals engaged in project-based work may be affected.
Under the federal Fair Labor Standards Act (FLSA), employees are entitled to minimum wage, overtime pay, and other benefits. In contrast, independent contractors are not entitled to such benefits. They generally have more flexibility to set their own schedules and work for multiple companies.
Su highlighted, “Misclassified employees don’t get paid for all their hours,” and their economic security is eroded due to misclassification. She emphasized that this rule provides greater clarity and consistency in determining a worker’s status.
The DOL final rule rescinds a 2021 rule in which two core factors—control over the work and opportunity for profit or loss—carried greater weight in determining the status of independent contractors. Under the new rule, employers would use a totality-of-the-circumstances analysis; therefore, none of the factors carry greater weight.
The new test includes six factors:
- The degree to which the employer controls how the work is done.
- The worker’s opportunity for profit or loss.
- The amount of skill and initiative required for the work.
- The degree of permanence of the working relationship.
- The worker’s investment in equipment or materials required for the task.
- The extent to which the service rendered is an integral part of the employer’s business.
“No factor or set of factors has a predetermined weight, and a totality of the circumstances of the working relationship must be considered,” Jessica Looman, administrator of the DOL’s Wage and Hour Division, said in a Jan. 8 press briefing. “The six factors are not exhaustive, nor are any of them more important than any others.”
Looman confirmed that work-related expenses imposed by the employer are not indicative of contractor status. Actions taken by the employer with the sole purpose of complying with the law do not indicate control exercised by the employer.
She noted that the final rule is meant to apply broadly to all types of workers, but not specifically to certain industries or work.
The DOL intends to release more guidance to help employers comply with the final rule.
In June 2023, a decision from the National Labor Relations Board (NLRB) altered the standard employers use to determine independent contractor status under the National Labor Relations Act (NLRA). The NLRB rejected the previous standard and emphasized considering entrepreneurial opportunity alongside traditional common-law factors. Independent contractors, unlike employees, cannot form unions or file unfair labor practice charges with the NLRB.
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