The Department of Labor (DOL) announced in January 2024 that it was issuing a Final Rule under the Fair Labor Standards Act (FLSA) to guide employers and employees in determining the status of a worker as an employee or independent contractor. The Final Rule takes effect on March 11, 2024, and is codified as 29 CFR § 795.100 through 795.115. Correct classification of a worker’s status is important: incorrectly classifying an employee as an independent contractor can mean the employee misses out on benefits and protection from the employer and potentially faces loss of wages. According to the DOL, the Final Rule aims to provide concrete guidance to employers who fall under the FLSA in properly designating their workers; however, some business and industries disagree with the DOL’s assessment and oppose the enforcement of it.
The DOL claims that the Final Rule maintains the overall rights covered under the FLSA and establishes a sort of checklist to assist employers in determining a worker’s designation. The DOL states the Final Rule uses analyses derived from decades of consistent prior case law that have been followed when making such determinations, and also invited, and considered, comments and input from varied industries that frequently must make such determinations in the operation of their businesses.
Historically, the FLSA included definitions for “employer” and “employee” and, using those definitions, sought to identify the correlation between the employer and the worker. No definition of “independent contractor” was provided, thus, a worker who fell outside the provided definitions simply was deemed to be an “independent contractor.” Under this early analysis approach, the essential question was: as a matter of economic reality, is the worker economically dependent on the employer for work (thus, an “employee”) or is the worker in business for themself (thus, an independent contractor)?
In 2021, in the absence of a clear definition of an “independent contractor,” the DOL sought to modify its method of determining a worker’s status by crafting the “Independent Contractor Rule” (2021 Rule). The 2021 Rule attempted to define what an independent contractor is, based on a weighted 2-factor method; however, the DOL later determined that this rule was inadequate and ultimately rescinded its modifications.
Believing that there is strong agreement among the federal courts of appeal as to both: (1) the factors used to determine “economic reality;” and, (2) the equality of weight assigned to each factor, the DOL seeks to utilize this historic approach to provide consistent analysis under the Final Rule. Determination of a worker’s status under the Final Rule “focuses on the economic realities of the worker's relationship with the … employer and whether the worker is either economically dependent on the potential employer for work or in business for [himself].” See, 29 CFR § 795.105. According to the DOL, the economic realities basis aligns with precedents established in prior case law.
It is important to note that while the DOL self-supports and lauds its new effort, the Final Rule has drawn sharp criticism from the very industries that rely on independent contractors for the operation of their businesses. Criticism for the Final Rule points out that the multi-factor approach utilized by the Final Rule is confusing and undermines flexibility that many businesses rely on, creating an ambiguous standard that forces employers to guess which factors are more important when assessing a worker’s status.1 These industries feel that the Final Rule will result in unnecessary litigation and will cause workers to be misclassified, which will lead to missed opportunities for work, or worse, the demise of businesses that rely on independent contractors. They say the ultimate impact will be felt by the American public when those critical industries are adversely affected by the Final Rule – industries that include builders and contractors, financial advisors, and the trucking industry – which are central to American life.
These industries support the 2021 Rule, claiming it was clear, supportive of small businesses, and promoted free enterprise and economic growth.2 Multiple lawsuits have been initiated to delay or halt the Final Rule from coming into effect. One such suit, brought by Frisard’s Transportation, LLC in the U.S. District Court for the Eastern District of Louisiana,3 argues that the “weighted factor” approach of the 2021 Rule clarified the analysis and simplified the determination – if the two weighted factors are present, then the worker is an independent contractor; however, if they are absent, only then does the analysis consider the lesser-weighted factors.
Similarly, in TX, eight industries brought suit against the DOJ in a joint effort to enjoin the DOJ from enforcing the Final Rule, and instead reinstate the 2021 Rule.4 These important industries include builders and contractors, financial services, workforce innovators, independent businesses, retail industries, and trucking associations. Each of these industries claims it is deeply and negatively impacted by the Final Rule because it is an “amorphous, vague, and unworkable standard”4 compared to the 2021 Rule, which “provides clarity for both workers and businesses.”4
Industries that rely on independent contractors for the operation of critical aspects of their business are teaming up to decry the “totality of circumstances” approach taken by the Final Rule, claiming that the six non-exclusive factors of the Final Rule deviate from or are inconsistent with prior case law and threaten the interests and ongoing functioning of these businesses.
Examining the Six Factors OF THE FINAL RULE
The analysis suggested by the Final Rule involves a 6-factor process of determination for independent contractor status. Each factor is given equal weight, unlike prior iterations of guidelines. The factors to be considered when determining a worker’s status are as follows:
1. any opportunity for profit or loss a worker might have;
2. the financial stake and nature of any resources a worker has invested in the work;
3. the degree of permanence of the work relationship;
4. the degree of control an employer has over the person’s work;
5. whether the work performed is essential to the employer’s business; and,
6. the worker’s skill and initiative.5
As used in this rule, the term “independent contractor” refers to workers who are not economically dependent on an employer for work and are in business for themselves. The Final Rule provides only a general standard for determining employee or independent contractor status, and specific scenarios can be addressed after the Final Rule takes effect.
Factor 1. Opportunity for Profit or Loss Based on Managerial Skill
ASK: Does the worker exercise managerial skill that affects his economic success or failure in performing the work?
CONSIDER: Whether the worker: (a) determines or negotiates the pay for work performed; (b) accepts or declines jobs; (c) determines the order and/or time a job is performed; (d) engages in marketing, advertising, or promotion of his work to secure more work for himself; (e) hires others; and/or (f) purchases materials and supplies and/or rents space for his work.
The items suggested for consideration are not exclusive; they merely are points to consider when differentiating between varying situations. The focus of this factor is on the opportunity for profit or loss. If a worker can determine or negotiate his pay without fear of loss, then that might negate the independent contractor status.
CONCLUDE: The items listed above indicate that a worker is in business for himself and is more likely to be an independent contractor rather than an employee.
Factor 2. Investments by the Worker and the Potential Employer
ASK: Are any of the investments made by the worker either capital or entrepreneurial in nature?
CONSIDER: Whether the worker’s investments would support an independent business or serve a business-like function.
The DOL claims that this factor corrects the 2021 rule (which weighted this factor more heavily than others) by adhering to longstanding precedent in case law in defining how to determine economic reality. The worker’s investments should be examined in comparison to the investments made by the employer, and, although they may not be equal in quantity, the quality or nature of the investments must be considered—whether they are business-like in nature, and/or whether the investments increase the worker’s ability to expand his own work or increase business for himself. This factor is closely related to the profit/loss analysis: if a worker’s expenditures have a direct effect on profit or loss, or provide him with greater opportunity for profit or loss, those costs likely are capital or entrepreneurial in nature.
Focusing on quantity creates an imbalance in the analysis. For example, if a truck driver purchases his own tractor-trailer, the quantity of his single purchase is small in comparison to the employer’s purchase of a fleet of similar vehicles. However, the quality analysis views the truck driver’s purchase as the same type as the employer’s, therefore, it is entrepreneurial and business-like in nature because it allows the worker to operate independently. In this example, the truck driver likely would qualify as an independent contractor. Examining the quality of the investment is a better indicator of whether the worker is dependent upon the employer for work, or is in business for himself.
Costs assumed by the worker to perform his job (such as the purchase or rental of tools, equipment, and/or vehicles) generally are not considered capital or entrepreneurial investments. Even where the employer imposes such costs or investments upon the worker, if the worker has no meaningful say in the matter—if the items tend to support the worker’s ability to do his job or do little to further business beyond the job—then the cost generally is not a capital investment such that the worker is in business for himself.
CONCLUDE: A worker’s expenditures that are capital or entrepreneurial in nature—such that a worker could operate his own business—indicate independent contractor status.
Factor 3. Degree of Permanence in the Relationship
ASK: Is the worker’s commitment indefinite in duration (continuous) and/or exclusive to the employer?
CONSIDER: Whether the degree of permanence of the work relationship is job-based, temporary, or occasional; and, whether the worker performs jobs exclusively for the employer or whether he is free to perform work for other employers.
Duration and exclusivity should be considered together. Employees typically have permanent work that is continuous in nature and is exclusive to the employer; whereas, independent contractors typically work for pre-determined periods and either move from one job to another or are free to perform work for other employers.
It is important to highlight, however, that performing occasional or intermittent work does not always mean the worker is an independent contractor. If the characteristics of the job are such that work typically is seasonal or temporary, then a worker might still be deemed an employee. For example, if the work is sporadic or per-job, but remains continuous over a term, or is repeating with the same employer, then the worker can be considered an employee. This is particularly so if the worker is not free to advertise himself for additional work from other employers, or does not economically profit from a lack of exclusivity. Additionally, if a worker has no power to influence their own permanence, this should weigh in favor of employee status.
Although independent contractors often have recurring jobs because they rely on repeat business and long-term clients, they typically do not seek a permanent or indefinite engagement with one employer. Thus, if the intermittent nature of the work is due to the characteristics of the job itself, rather than a worker being in business for himself, then the worker can be deemed an employee.
CONCLUDE: The more permanent and exclusive the relationship, the more likely the worker is an employee.
Factor 4. Nature and Degree of Control the Employer Has Over the Worker
ASK: To what degree does the employer exercise control over the worker and aspects of the job performance?
CONSIDER: Whether the employer: (1) makes decisions related to scheduling and amount of pay; (2) supervises the performance of the work; (3) assigns the work to be performed; (4) permits the worker the freedom to perform work for others; and, (5) determines quality controls over the work performed.
In prior rules issued by the DOL, the degree of control factor was a “core” consideration, and was afforded more weight than the other five factors. However, under the Final Rule, this factor is given equal weight among all six factors.
Also, in prior rules, there was a dual-focus approach that evaluated both the employer and the worker. The Final Rule not only seeks to apply equal weight to each of the six factors, but as to control, focuses its examination only (or mostly) on the employer’s control over the worker rather than the worker’s control of the job.
Each of the items listed above are important considerations, but they are not exclusive when evaluating the nature and degree of control the employer exercises over the worker. It is a measure of degrees when evaluating control. For example, both employees and independent contractors can exercise some level of control and flexibility over their schedules, but the degree to which the employer remains in control of the flexibility will indicate what status the worker holds. It is important to examine the degree to which the employer makes scheduling decisions and whether the worker is excluded from making such decisions for his own workload.
Similarly, if the employer expressly limits the worker’s ability to perform jobs for others and/or places demands on the worker’s time such that he is limited from taking other jobs, then the degree of control is high and the worker likely is an employee.
And, with regard to supervision, the measure is not simply that an employer supervises the worker, it is a measure of how closely the employer supervises the work (commensurate with the supervision required for the type of work being performed). Notably excluded from the evaluation of an employer’s exercise of control are legally-mandated requirements, because they are government-imposed and are applicable to employees and independent contractors alike.
CONCLUDE: There are a number of factors that can indicate whether an employer is exercising control over a worker, and it is a determination of the nature and degree of control – the greater control an employer maintains over a worker across several categories, the more likely it is that the worker is an employee.
Factor 5. Whether the Work Performed is Essential to the Employer's Business
ASK: Is the employer’s business economically dependent on the work performed?
CONSIDER: Whether the work being performed is critical, necessary, or central to the employer's principal business.
The evaluation here is a common sense analysis: if the employer’s business could not function without the service performed by the worker, then the service he provides is essential and indicates that the worker is more likely to be considered an employee. The focus is on the work being performed, rather than the worker himself or the employer.
If the work being performed is a main aspect or the success of the business, then it – and the worker who performs the work – are essential and are more likely to be considered employees. Critics of this factor argue that businesses hire only workers or contractors that are essential, therefore this factor includes all employees and independent contractors. But the DOL emphasizes that this is only one factor to consider equally with the others, and reiterates that the focus is on the principal aspect of the business.
CONCLUDE: If the potential employer could not function without the service performed by the worker, then the service he provides is integral and he likely will be considered to be an employee.
Factor 6. The Worker’s Skill and Initiative
ASK: Does the worker use specialized skills to perform the work and do those skills contribute to business-like initiative?
CONSIDER: Whether both factors are present: specialized skill and business-like initiative.
If a worker does not use specialized skills to perform the work, or depends on employer training to perform the work, then he likely is an employee. Specialized skills are not a standalone part of this factor, as some work inherently requires a specialized skill that the worker brings to the job. The analysis involves both skill and initiative – whether the worker’s skills are used in a business-like manner, such that the worker is initiating the operation of his own business. Use of the skills alone does not indicate independent contractor status without the aspect of independent business-like initiative.
CONCLUDE: If the worker exercises a business-like initiative in utilizing a specialized skill for the job, then he likely is an independent contractor. Noteworthy here is that the DOL agreed with commenters that, although truck drivers typically are not classified as “skilled labor,” CDL license holders possess a sufficient skill set such that a worker who uses his truck driving skills in a business-like initiative would indicate he is an independent contractor.
CONCLUSION
The DOL’s Final Rule, which provides a 6-Factor analysis, essentially is an evaluation of economic reality: a determination of the degree to which a worker is in business for himself, or is economically dependent on the employer. No one factor is determinative by itself, rather, all six factors are given equal weight and consideration consistent with the central economic reality analysis. If a worker’s business can exist with or without the employer, then the worker is more likely considered to be an independent contractor.
The DOL claims that its purpose in issuing its Final Rule is to provide consistent guidance to employers in determining whether workers are economically dependent on the employer for work, or are in business for themselves, and is meant to assist workers in assessing whether they are correctly classified as employees or independent contractors. But the very businesses and industries impacted by the Final Rule disagree with the DOL’s assessment and are mustering forces to stand against it.
References
Unless other citations are noted, all facts and substantive information were derived from the Federal Register of the National Archives report on the proposed Final Rule, located at: https://www.federalregister.gov/documents/2024/01/10/2024-00067/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act.
1. ABC Newsline, “DOL Rescinds and Replaces ABC-Supported 2021 Independent Contractor Final Rule,” January 9, 2024, https://www.abc.org/News-Media/Newsline/dol-rescinds-and-replaces-abc-supported-2021-independent-contractor-final-rule
2. ABC Newsline, “ABC Supports Final DOL Revisions to Independent Contractor Status,” January 6, 2021, https://www.abc.org/News-Media/News-Releases/abc-supports-final-dol-revisions-to-independent-contractor-status
3. Frisard’s Transportation, LLC v. U.S. Department of Labor, et al., U.S. Dist. Ct. for the Eastern Dist. of Louisiana, Case No. 2:24-cv-00347-EEF-MBN.
4. Coalition for Workforce Innovation, et al. v. Julie Su, et al., U.S. Dist. Ct. for the Eastern Dist. of Texas, Beaumont Div., Case No. 21-cv-00130-MAC.
5. See, www.dol.gov, Newsroom release, January 9, 2024.
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