DOL: NEW RULES FOR EMPLOYEES vs. CONTRACTORS | Scolaro Fetter Grizanti & McGough, PC | Watertown, NY

By:  Elizabeth M. Maugeri, Esq.

The Department of Labor issued a new final rule regarding the distinction between employees and independent contractors on January 10, 2024. This rule, while in some ways is similar to the 2021 Independent Contractor Rule (IRC), mostly departs from the previous iteration.

The Department believed the 2021 IRC was not fully in agreement with the framework outlined in the Fair Labor Standards Act (FLSA) or the courts' interpretation of the FLSA by departing from accepted case law in applying the economic reality test. Thus, on October 13, 2022, the Department published a Notice of Proposed Rulemaking (NPRM) regarding the classification of employees versus independent contractors under the 2021 IRC.

The final rule returns to the notion of framing of investment by a worker as its own separate factor, and the most significant factor being whether the work performed by the worker is an integral part of the potential employer’s business. However, the final rule maintains that no one factor is determinative in assessing if a worker is an employee or independent contractor. Additionally, it offers a broader discussion of how scheduling, remote supervision, price setting, and the ability to work for others concurrently should be considered as factors and allows for more consideration of reserved rights, which was minimized in the 2021 IRC. The main purpose of the changes made was to avoid any potential misclassification of workers whether intentional or accidental. The rule maintains that part 795 continues to contain the Department’s general interpretations.

After taking comments, the Department published the final rule, which consists of an outline of six, non-determinative, factors for consideration. The factors are: (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. Other relevant factors may be considered on a case-by-case basis. These six factors are meant to be offered as a guide for assessment as to the economic realities of the working relationship.

When assessing opportunity for profit or loss depending on managerial skill, the Department implores potential employers to consider if their workers have opportunity for profit or loss that affect the worker’s economic success or failure when performing the work. Factors that may be relevant to this assessment could be whether the worker can meaningfully negotiate the charge or pay for their work, whether the worker accepts or declines jobs on their own, whether the worker makes hiring decisions, or if the worker chooses when or how the work is performed. If the worker does not have these types of opportunities available, then this factor suggests that they may be an employee.

When considering the second factor, whether any investments by the worker are capital or entrepreneurial in nature, the assessment asks what the costs are to the worker for performing the job. Notably, some costs that are unilaterally placed on the worker by the potential employer, such as the tools or equipment needed to perform the job, or the cost of the labor do not necessarily suggest the worker performs independently. If the worker has opportunity to do differing types of work, reduce costs, or extend their market reach, this may indicate they are an independent contractor. However, the costs to the potential employer and to the worker should be considered relative to each other. The comparison should be done on investments, such as if the worker is making similar investments as the potential employer, even if on a much smaller scale.

The third factor weighs in favor of a worker being an employee when the working relationship between the worker and the potential employer is indefinite, continuous, or exclusive. However, this does not imply that temporary or seasonal workers should be considered independent contractors as the lack of permanence due to operational characteristics to a particular business should be considered in these circumstances. A worker may an independent contractor if the work performed is non-exclusive, project-based, or generally sporadic.

Fourth considers the control over the worker and the working relationship that the potential employer has. It may be relevant to consider whether the potential employer sets the worker’s schedule, supervises the work, limits the worker’s ability to work for others, or the sets pricing or rates of the services. Additionally, when a potential employer’s actions in regard to the worker go beyond that is required for compliance with federal, state, or local laws and regulations, this may be suggestive of an employer-employee relationship.

The fifth factor is one of the more significant factors, and asks whether the work performed by the worker is integral to the potential employer’s business. This factor does not ask whether the worker themselves are integral, but rather if the work they perform is. This factor will likely consider a worker an employee if the work performed is critical, necessary, or central to the potential employer’s business.

The final factor considers whether the worker utilizes specialized skill sets to perform their work and if those skill sets contribute to a business-like initiative. If the worker does not utilize specialized skills or if the worker is dependent on training to learn or utilize specialized skills, then the factor weighs towards the worker being an employee. However, if the worker brings a specialized skill set to the jobs they perform, this does not automatically indicative of the worker being an independent contractor. The worker’s use of the skills in connection with the job itself is what matters in most cases.

While the final rule does not act as anything other than a reinforcement of already established legal guidance, it leans more pro-employee than its predecessor. The impact of it is likely to be felt by companies in the gig economy, such as food delivery (i.e., DoorDash, Postmates, UberEats) or transportation mobility services (i.e., Uber, Lyft); freelancers; construction workers; and truckers. Litigation has already been brought forth by associations and individuals in these spaces, who argue that the final rule creates a much vaguer landscape for assessment which will ultimately force independent contractors into unnecessary employment relationships. Decisions by the courts regarding the filed complaints have not yet been issued.

The final rule does not impact any other federal, state, or local laws that use other determinative factors for employee classification.

This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.