How to Determine if a Worker is an Employee or Independent Contractor? Department of Labor Issues Final Rule

By Corie J. Anderson - Peters, Revnew, Kappenman & Anderson, P.A.

January 9, 2024

On January 9, 2024, the U.S. Department of Labor (DOL) announced its much-anticipated final rule, revising the DOL’s guidance (this is my nice way of saying “administrative flip flopping”) on how to determine if a worker is an employee or an independent contractor under the federal Fair Labor Standards Act (FLSA).  The final rule is similar to the proposed rule the DOL announced on October 13, 2022 (that I blogged about here), and will go into effect on March 11, 2024.  Not surprisingly, the rule significantly narrows the definition of “independent contractor”. If you’re wondering why I have posted a picture of ducks…keep reading.

Background

In January 2021, the DOL (under President Trump) issued a rule outlining a five factor test for determining a worker’s status.  Under this Trump-era rule, two factors were designated to be of greater importance: (1) nature and degree of control the worker has over their work; and (2) worker’s opportunity for profit or loss.  The other three factors are designated as less probative: (3) amount of skill required for the work; (4) degree of permanence of the working relationship; and (5) whether the work is part of an integrated unit of production.

Not surprisingly, the Biden administration promptly published rules to delay and withdraw this Trump-era rule.  However, a federal district court found that the Biden administration failed to follow proper procedures to withdraw the Trump-era rule, and that the Trump-era rule had gone into effect on March 8, 2021.  The DOL’s January 9, 2024 announcement formally withdraws the Trump-era rule, and replaces it with a new rule, returning to the totality-of-the-circumstances approach (similar to California) for determining employee-or-independent-contractor status.

DOL’s New Final Rule

The DOL’s final rule, like the Trump-era rule it replaces, states that a worker is an employee if the economic reality is that the worker is dependent on the employer for work.  The rule lists six factors, states that none of the factors has any predetermined weight, and additionally states that additional factors may be relevant if they in some way indicate whether workers are in business for themselves, or are economically dependent on an employer for work. Clear as mud, eh?

From March 11, 2024 forward, a worker’s status as an employee or independent contractor will be determined based on consideration of all the following factors: (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; (6) skill and initiative; and (7) any additional factors indicating whether workers are in business for themselves, or are economically dependent on an employer for work.

The final rule includes specific examples of situations where each factor may weigh in favor of employee status or in favor of independent contractor status.  While these examples are generally based on past court precedents and past DOL interpretations, the DOL did make some changes in the final rule, based on public comments received during the rulemaking process.  For example, the final rule states that employer actions taken for the sole purpose of complying with a specific, applicable law or regulation are not indicative of control, while employer actions that go beyond such compliance are indicative of control.  The final rule also states that investments by the worker and the potential employer should not be compared only in terms of dollar values, but should also be compared in terms of the nature of the investments: if the worker is making similar types of investments as the potential employer (even on a smaller scale), that factor weighs in favor of independent contractor status.  On the other hand, a cost unilaterally imposed by a potential employer (such as requiring workers to obtain specific tools) are not considered “investments” by the worker, because they are unilaterally imposed by the potential employer.

Takeaways

The DOL’s final rule basically nullifies the 2021 Trump-era rule; other than the above-noted changes made in response to public comments, the DOL’s final rule basically goes back to the DOL’s position prior to the Trump administration (pre-2017).  My advice to clients continues to be that the DOL’s starting point is that a worker is an employee, until proven otherwise.  And, my simple advice to clients continues to be: if it looks like a duck, quacks like a duck…it’s probably a duck (whether it is a grey duck or goose, depends if you are reading this in Minnesota or literally anywhere else…).

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