Finally, the US Department of Labor has finalized the long-awaited, anticipated “new” Independent Contractor rule. Except it really isn’t so new.
What? Isn’t it though?. It rescinds the previous rule – as in the one issued by the Trump Administration—and it takes effect on March 11 , 2024. So isn’t it a new rule then? Well yes — but no. Read on. I’ll explain.
Well, it is a change, from what’s in effect now, but it’s not really so new. Basically, it’s a change back to what was in place before the rule change that occurred under the Trump Administration. In other words, we’re basically going back to what we had before we had the rule that’s in effect now.
OK, so let’s look at both rules.
Both rules apply what’s known as the “economic realities” test, meaning, per the DOL, “whether the worker is either economically dependent on the potential employer for work or in business for themself.” So far, that standard is consistent with many decades of case law’s interpretation of the Fair Labor Standards Act. The question, though, is how to decide whether the worker is economically dependent on the potential employer. Under the previous rule the DOL weighed (and therefore required employers to weigh) the following 6 factors:
(1) Opportunity for profit or loss depending on managerial skill: can the worker decide what jobs/tasks to accept, what to charge, engage in marketing and other efforts to get more work (beyond deciding to work more/fewer hours or to take on more jobs when paid a fixed rate per hour or job)?
(2) Investments by the worker and the potential employer: is the nature of the investments “entrepreneurial” or capital? Will the worker’s investments increase the worker’s ability to more, or different work, or reduce the worker’s costs, or extend the worker’s market reach?
(3) Degree of permanence of the work relationship: A continuous, indefinite duration that excludes work for other employers tends to indicate an employer-employee relationship (though it could be part-time or temporary employment).
(4) Nature and degree of control: the ability to control the means, method and manner of work (whether or not actually exercised).
(5) Extent to which the work performed is an integral part of the potential employer’s business: is the function the worker performs integral to the business (e.g., a house painter hired for a house painting business performs work integral to the business.)
(6) Skill and initiative: does the worker bring specialized skills to the relationship that seem to indicate “business-like” initiative, (a term the DOL does not define. Thanks, DOL.)
In theory, no single factor was more controlling than any of the others. The DOL used a totality of circumstances test, which requires a case-by-case assessment. The Trump rule, while not doing away with any of the above factors, attributed more importance to the first and fourth factors. If both of those two factors weighed in one particular direction, then no consideration of the other 4 factors was necessary. Only if weighing both of Factors #1 and 4 could not provide a clear or consistent answer would you have need under the current test to consider the other four factors.
The ”new” rule essentially restores the previous 6-factor totality-of-circumstances test and adds a seventh, catch-all factor, appropriately named “Additional Factors” – basically anything else that might be relevant to determining if someone is operating their own independent business.
Does this not-so-new rule matter though? I revert to Lawyer’s Stock Answer #1: It depends. (I know you all love hearing that answer.) On what does it depend? Lawyer’s Stock Answer #2: The circumstances.
This is the test the USDOL will apply for matters relating to minimum wage, overtime or other protections afforded a worker under the FLSA.
Courts may still use their own variants. The IRS uses its own 20-factor test when it determines whether you should be withholding payroll taxes from a worker’s pay. Then there’s the National Labor Relations Board. Oh, and then there are the State Departments of Labor that may apply more stringent tests. The following states have their own tests, referred to as “ABC” tests (because there are usually 3 factors labeled “A” “B” and “C”): Alaska, Arkansas, California, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Kansa, Louisiana, Maine, Maryland, Massachusetts, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Oregon, Tennessee, Utah, Vermont, Washington, and West Virginia.
Basically, it depends on who’s looking at your relationship with your workers. The US DOL test will have no impact in the above “ABC” states. It may have little or even no impact in court, or in front of the NLRB or other government agencies. That said, at least some of the above six factors are usually present in all independent contractor tests.
When should you be concerned about the US DOL’s not-so-new independent contractor rule then?
If there’s any question about minimum wage, or overtime pay, (and the employee(s) in question don’t work in an “ABC” state, if the US DOL comes calling to do an audit, those are times to be concerned about this rule. Basically any time the US DOL might be involved is when this rule will have impact. That said there are many contexts in which it won’t.
If that’s not enough, there are already two court challenges to this not-so-new-rule. One is from businesses that include Uber and Lyft that involves a motion to revive litigation challenging a previous Biden Administration rule that would have rescinded the current (Trump) rule. The other challenge is actually from freelancers who want to remain freelancers and feel the (not-so) new rule would not allow them to do so.
Bottom line: While the rule isn’t really new, and while the change is basically a change back, yes you should be aware of its impact and be guided accordingly. That said, in many contexts where it won’t have any impact and therefore won’t really change anything, and it may not even come to be all if either of the two legal challenges succeed.
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