U.S. Department of Labor Rolls Out New Independent Contractor Rule

Earlier this week, the U.S. Department of Labor (DOL) announced its final rule addressing worker classifications under the Fair Labor Standards Act (FLSA). The new rule goes into effect on March 11, 2024 and is very similar to the proposed rule issued by the DOL in 2022. In short, the new rule rescinds the independent contractor rule adopted during the Trump Administration and restores a multi-factor analysis in determining whether workers are properly classified as employees versus independent contractors.

During the Trump Administration, the DOL adopted a worker classification rule that focused on two “core” factors in deciding whether an individual was an employee or independent contractor: (1) the nature and degree of control over the relevant work, and (2) the opportunity for the individual to earn a profit or loss. The rule was deemed friendly to businesses who utilize independent contractors because the rule minimized other factors including the amount of skill required for the work, the degree of permanence in the working relationship, and whether the duties are part of an integrated unit of production.

The New Rule

Starting on March 11, 2024, employers will need to consider a more stringent test. The new rule marks the return of a multi-factor analysis that requires consideration of six (6) “economic reality” factors, each bearing equal weight:

(1) The individual’s opportunity to sustain a profit or loss based on his or her management skills;

(2) Investments by the worker and potential employer;

(3) How permanent the working relationship is between the worker and the potential employer;

(4) The nature and degree of control exercised by the potential employer over the work and the relationship;

(5) Whether the work is an integral part of the potential employer’s business; and

(6) The skill and initiative of the worker.

The above factors are not exhaustive and other factors may be relevant in reviewing the “totality of the circumstances.” In the event the DOL finds a misclassification, potential employers can be subject to substantial penalties for unpaid overtime, minimum wages, liquidated damages, and attorneys’ fees and costs.

Takeaways for Employers

The new rule reinforces the DOL’s pro-employee view regarding worker classification and will impact workers within the gig economy and other industries going forward. Employers have a short window to ensure that workers are properly classified (until March 11, 2024). The DOL investigators will utilize the new rule as controlling precedent when conducting audits and initiating compliance actions.

The Labor and Employment team at McGrath North is ready to assist you in answering any questions and evaluate compliance with the new rule. We will continue to monitor and report on any developments relating to the new rule.