This past week, the U.S. Department of Labor (DOL) issued a final rule for the classification of workers as employees or independent contractors.  The changes in regulations pertaining to the Fair Labor Standards Act (FLSA) were formally posted in the Federal Register on January 10, and will take effect March 11 of this year.  The rule replaces a short-lived and controversial rule that has been in place since 2021, known as the “2021 IC Rule.”

Summary

DOL’s new regulations for worker classification reinstitute a “totality of the circumstances” test based on six equally important factors: (1) Opportunity for profit or loss; (2) Investment; (3) Permanency; (4) Control; (5) Integral Part of the employer’s business; and (6) Skill and initiative. Employers should take notice of this rulemaking, as it may have a significant effect on their approach to recruiting employees and engaging with contractors, and they should make hiring/contracting decisions based on the real conditions of work.  Cranfill Sumner’s experienced employment attorneys stand ready to help you “work it out” and operate under DOL’s new rule.

Background

Over the years, both the DOL and various courts have applied the “economic reality test” to determine whether workers should be treated as employees or independent contractors for purposes of compliance with the FLSA, with differing and evolving factors being used.  The high-level objective is to gauge whether the economic realities of a given work situation are such that the worker is dependent economically on the employer for a livelihood and is thus an employee or is instead in business independently.   The various factors used for these analyses and how much weight each one should be allocated has been critical in how the courts have reached conclusions, and much of the DOL’s Wage and Hour Division’s focus has been on the nature of these factors.  Over time (until 2021) six factors have been generally recognized:

• Opportunity for profit or loss
• Investment
• Permanency
• Control
• Integral Part of the employer’s business
• Skill and initiative

These factors, in various forms, have been informative in many agencies’ and states’ employment-related areas.  In North Carolina’s worker’s compensation system, for example, the nature of “control” over a worker was a key consideration in the Supreme Court’s landmark ruling finding for independent contractor status in Hayes v. Board of Trustees of Elon College, 224 N.C. 11, 29 S.E.2d 137 (1944).  Although just one example, it is illustrative of the wide net that is cast over the legal ocean by a small set of factors.

Current Rule

The 2021 IC Rule, issued in the final days of the prior administration, departed from the approaches taken over the years and the regulations that had supposedly reflected the historic trends, by identifying five factors, and then providing that two of those factors were “core factors” and carried greater weight than the others.  Those two core factors were the “nature and degree of control over the work and the worker’s opportunity for profit or loss.”  In many respects, the 2021 IC Rule was supposed to reduce uncertainty in worker classifications, but it was viewed by many as creating more issues that it resolved.  In the spring of 2021, DOL – then under new leadership – tried to withdraw the rule, but court intervention prevented that withdrawal, so the 2021 IC Rule has effectively been regulatory law until now.

Impact of the New Rule

The new rule eliminates the “core factor” concept and reestablishes the importance of the economic reality test, and it tries to implement what DOL refers to as the “totality of circumstances” analysis to evaluate economic dependence.   The rule restores the six legacy factors without assigning any kind of weighting to each, and it emphasizes that no one factor is necessarily controlling. In many respects, the 2024 rule reverses the changes imposed by the 2021 IC Rule, and on its face purports to restore the regulations to pre-2021 status, but that is not the entire story. 

The change has generated mixed responses so far, with some representatives of the “gig economy” such as Uber drivers and similar workers voicing muted concern. The absence of a strong response (either pro or con) from that growing segment of commerce is baffling, but that may be an indication that the actual text of the rule is viewed as generally neutral in its impact on such workers, and it will take time and lawsuits to see whether the new rule makes much of a difference. Other industry groups – particularly in the trucking and construction industries – have expressed skepticism of the government’s real objective and are concerned as to the likelihood of the new rule to tip the scales in favor of regulators or courts finding for employment status.  This uncertainty is, perhaps, a byproduct of DOL’s stated intent of aligning the regulations with the judicial precedents pertaining to the FLSA and the sense in some industries that regulators generally disfavor independent contractor treatment of worker in all but the most extreme cases. In all likelihood though, the practical effects of the rule will be apparent only after subsequent cases are brought and fought, and not so much based on a simple read of the revised regulations.

Why the Change?

DOL received just over 1,800 public comments to the proposed rules adopted in 2021, and another 55,400 comments from the public for the new rules, reflecting a tremendous increase in public attention to this topic.  DOL’s rationale for the changes, based on the public feedback, is that the 2021 IC Rule adopted too narrow of a set of metrics by using the core factors, and by elevating those two factors and devaluating others, that signalled to the market that employers could thereafter have more freedom to classify and hire workers as independent contractor rather than as employees.  Whether that was the intent of the DOL in the 2020-2021 period or simply perception, DOL, now under new management, is seeking to eliminate that presumption of relaxed standards.  A large part of DOL’s stated purpose in replacing the 2021 IC Rule is to signal a restoration of prior interpretation of the FLSA and to eliminate what DOL cites as confusion and misapplication of existing law.  A number of comments received by DOL reflected concerns that DOL was trying to eliminate or greatly reduce the numbers of workers classified as independent contractors, however DOL denies that it has that objective and goes on to state that it views this new rule as merely restoring the analysis to align with the proper view of the FLSA prior to 2021.

What’s Next?

Whether DOL’s stated intent to return to prior, supposedly consistent, regulatory law is yet to be seen.  A lot depends on what agencies and the courts do next in reliance on the new rule. Certainly, more analysis of the 2024 rule will be needed in order to assess how DOL, the courts and other agencies will apply the regulations going forward, and whether the rule actually leads to greater certainty for employers in their staffing is yet to be seen.   

Sage advice for employers trying to sort this out:  Make hiring/contracting decisions based on the real conditions of the work and seek legal advice from experience employment counsel.