The latest final rule on independent contractors issued by the U.S. Department of Labor (DOL) returns to the economics reality test effective March 11, 2024. This final rule rescinds the rule published at the end of the Trump administration, which prioritized two factors in evaluating whether workers were properly classified as independent contractors, and returns to a totality-of-the-circumstances analysis, which examines six factors without prioritizing any over the others. The DOL’s initial attempt to withdraw the Trump-era rule was stymied when a federal judge found that the DOL violated the Administrative Procedure Act by failing to seek comment or consider policy alternatives. The DOL has now sought public comment, considered policy alternatives, and returned to the familiar multi-factor economic realities test, which was in use at the USDOL from at least 1954 until 2021 and is widely viewed as a more employee-friendly standard.

The DOL is one of many government agencies at the federal level (including the Internal Revenue Service (IRS), Occupational Safety and Health Administration (OSHA), Equal Employment Opportunity Commission (EEOC), and National Labor Relations Board (NLRB)), not to mention state agencies that administer laws governing workers’ compensation and unemployment, interested in correct classification of workers as employees or independent contractors. Many legal requirements and protections enforced by these agencies apply only to employees and not to independent contractors. Government agencies use a variety of tests to analyze workers’ relationships to determine if workers are employees or independent contractors.

The DOL enforces the Fair Labor Standards Act (FLSA), which applies only to “employees”—not to independent contractors. The FLSA unhelpfully defines an employee as “any individual employed by an employer.” 29 U.S.C. § 203(e)(1). It expands on this circular definition by defining employer to mean “any person acting directly or indirectly in the interest of an employer in relation to an employee.” As far back as 1947, quoting Senator Hugo Black, the U.S. Supreme Court described the FLSA as having “the broadest definition [of employee]…ever included in any one act.” United States v. Rosenwasser, 323 U.S. 360, 363 n.3 (1945).

The DOL’s announcement of the final rule noted that “misclassification of employees as independent contractors may deny workers minimum wage, overtime pay, and other protections.” The DOL also stated that the final rule will reduce the risk that employees are misclassified…while providing added certainty for businesses that engage (or wish to engage) with individuals who are in business for themselves.”

Business groups responded to the announcement with criticism and have suggested they may challenge the final rule in court. Marc Freedman, Vice President of Workplace Policy for the U.S. Chamber of Commerce, issued a statement summarizing the concerns of many businesses. Mr. Freedman stated that the new regulation:

[I]s clearly biased towards declaring most independent contractors as employees, a move that will decrease flexibility and opportunity and result in lost earning opportunities for millions of Americans. It threatens the flexibility of individuals to work when and how they want and could have significant negative impacts on our economy. Making matters worse, the rule is completely unnecessary, as the Department continues to report success in cracking down on bad actors that are misclassifying workers.

Senator Bill Cassidy, M.D. (R-LA), ranking member on the Senate Committee on Health, Education, Labor and Pensions (HELP), has also indicated he will introduce a Congressional Review Act (CRA) resolution to repeal the rule. Dr. Cassidy tied his criticism of the rule to concerns that employees can be forced or coerced into working with unions, stating “Independent contractors, or freelancers, are shielded from forced or coerced unionization that would strip their flexibility away. This has made eliminating freelancing a top priority for large labor unions who want more workers paying forced union dues.” This criticism appears to conflate the DOL’s FLSA enforcement with the NLRB’s enforcement of the National Labor Relations Act. However, in The Atlanta Opera, Inc., the NLRB also recently shifted away from Trump-era precedent and back to an earlier standard viewed as more employee friendly.

The old-and-new economic realities test considers the following six factors:

1. The 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 the person does is essential to the employer’s business; and
6. The worker’s skill and initiative.

While the rule in place from March 8, 2021 through March 11, 2024 emphasized the first and fourth factors as the most probative of a worker’s economic dependence on a company, the new rule weighs all of the factors equally. The DOL’s Small Entity Compliance Guide provides further insight into the agency’s view of each factor. Notably, the examples contained in that compliance guide share common features with the old IRS 20 Factor Test, which is one version of a common law test for independent contractor status and remains useful in structuring independent contractor arrangements. (The IRS now uses a simplified three factor common law test).

Employers should anticipate increased challenges in appropriately structuring and defending independent contractor relationships. Wise employers will place increased scrutiny on these relationships and revisit their agreements with independent contractors. Maynard Nexsen’s Labor and Employment team is prepared to assist our clients in evaluating whether their current agreements accurately describe relationships with independent contractors and whether any changes can be made to reinforce appropriate classification in how those relationships and agreements are structured.