On January 9, 2024, the U.S. Department of Labor (the “DOL”) announced the final rule regarding when employers can classify workers as independent contractors under federal labor law. The DOL first proposed the rule in October of 2022.

What Employers Need to Know

The DOL’s new rule has consequences for employers. More individuals are likely to be classified as employees rather than independent contractors. Most federal and state labor laws apply only to employees. The rule can be expected to increase labor costs for many sectors including trucking, retail and manufacturing.

The rule establishes a six-factor test for determining whether a worker is an employee or independent contractor. The six factors, which are nonexhaustive, include:

• Worker’s opportunity for profit or loss;
• Investments made by the worker and the potential employer;
• The degree of permanence of the work relationship;
• The degree of control an employer has over the work;
• The extent to which work performed is integral to the employer’s business; and
• The use of a worker’s skill and initiative.

The DOL describes the rule as providing “greater clarity and consistency in determining a worker’s status, which helps workers and businesses know when they should be covered by the Fair Labor Standards Act.” Notably, the rule rescinds an independent contractor rule that was issued but never went into effect under President Trump, that focused more narrowly on two factors of the economic realities test.

The final rule does not adopt the ABC test which analyzes (1) the extent of the employer’s control over the work, (2) whether the work performed is outside of the usual course of the employer’s business, and (3) whether the worker customarily engages in this type of work. The ABC test is used in some jurisdictions like California, Massachusetts, Ohio and West Virginia.

The rule will likely face challenge in the courts. However, the DOL feels confident about the rule and states that “we considered the relevant case law under the Fair Labor Standards Act in developing the rule and are certainly prepared to defend the rule if there are any challenges.”

The rule will be published in the Federal Register on January 10, 2024 and will take effect on March 11, 2024.