The (Not) Final Rule Addressing Worker Classification as an Independent Contractor Under the FLSA

By Rebecca Bruch, Esq.

Undoubtedly you all took to heart my New Year’s Resolutions blog in November, and you are not surprised about the so-called Final Rule for Worker Classifications issued by the FLSA on January 9, 2024 which is anything but “final.” I had suggested you might want to get a head start on this inevitable change, and recommended you take a look at all your arrangements with independent contractors. If so, you are miles ahead of those who got bogged down in the day-to-day chaos of your job and did not get a chance to get a jump on the revisions. The changes were announced and will take effect March 11, 2024.

What changes, you say? No one should hit themselves on the head with a hammer if this fairly significant change caught you off-guard. As sure as the sun comes up, or a change occurs in the political party in control, the analysis for determining whether a worker is an independent contractor, or an employee, is going to change. And so, once again, it did.

What was the old (not) Final Rule? That rule under the Trump administration focused on two “core” factors in its analysis: (1) the nature and degree of control over the relevant work; and (2) an individual’s opportunity for profit or loss. It had three remaining factors which had less weight in the analysis: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship; and (3) whether the work is part of an integrated unit of production. Remember that the end goal under the philosophy of the post-Obama administration was to create more independent contractors and fewer employees. It was a business-friendly approach.

What is the new (not) Final Rule? With the new (not) “Final Rule,” the goal was to create a more employee-friendly analysis, seeking to have more workers be employees, and fewer be classified as independent contractors. The new (not) “Final Rule” returned to the six-factor analysis of the Obama administration. The factors are these: (1) the opportunity for profit or loss depending on managerial skill; (2) investments by the worker and potential employer; (3) the degree of permanence of the work relationship; (4) the nature and degree of control over performance of the work and working relationship; (5) the extent to which the work performed is an integral part of the potential employer’s business; and (6) the skill and initiative of the worker.

According to the DOL, the new (not) “Final Rule” is intended to reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves. While the DOL aspires to “provide a consistent approach for businesses that engage with individuals who are in business for themselves,” if history repeats itself, the new (not) “Final Rule” will be as complicated and as difficult to apply as every other past iteration of the regulation, not matter where the politics stand. If you are a company that relies heavily on independent contractors or workers participating in the gig economy, these changes will become yet another chapter in the history of trying to comply with the rules in good faith and getting no help from the Department of Labor or courts to do that.

At its essence, the new (not) “Final Rule” looks to the economic independence of the worker to determine whether a worker is in business for themselves. The amount the worker earns or whether the worker has other sources of income does not play a role in the analysis. The DOL looks at investments made by the company and the worker but does not consider investments made by the worker as compared to the investments of the company. Costs imposed by the company should not be considered investments made by the worker and the potential employer. The focus is on the types of investments made by each, not the relative size of the investments.

DOL will also be looking at the actions taken by a potential employer for the sole purpose of complying with applicable laws. While actions taken will not be definitive, the compliance methods, e.g., quality control or customer service standards may influence a determination of status.

Why do I say this is the “(not) Final Rule”? The “Final Rule” only applies to enforcement of the FLSA to ensure that workers who should be covered under the Act are properly classified as employees. Its goal is to “combat work misclassification.” That being said, most federal circuits, guided by case law, have legal tests in place for determining independent contractor status that will give little regard for the “Final Rule.” In addition, the U.S. Supreme Court has cases on its docket this year that may affect the application of the DOL. In addition, lawsuits will be filed over the new “Final Rule,” and the Republican members of the Senate have vowed to repeal the Rule. And if that’s not enough, the Final Rule does not apply to other federal laws, like the National Labor Relations Act, as well as state wage-and-hour laws.

What does that all mean? It means that you need to be more proactive than ever about how you are classifying workers for independent contractor status. Take a look at your current independent contractors to make sure you are comfortable with their designation. Take a look at the arrangements you are contemplating for new workers. We have all experienced the situation you have heard me utter in almost every case: Everything’s good until it’s not. Employees oftentimes say they want to be independent contractors, or they want comp time in lieu of paid overtime, or many other conditions of employment, and then something goes awry, and you hear from the Labor Commissioner. Be sure you look at all the factors when you are considering whether to classify someone as an independent contractor, including those factors under state wage-and-hour laws, and other considerations.

The employment attorneys at Lemons, Grundy and Eisenberg are available to talk about this challenging area of law.