Employment Law Blog

Here We Go Again: New DOL Independent Contractor Rule In Effect

In the continuing tug of war that has taken place with recent successive presidential administrations, the Department of Labor (“DOL”) on January 10th, 2024, published a new final rule to once again define “independent contractor” for purposes of the Fair Labor Standards Act (“FLSA”). The new rule adopts a six-factor test to determine the “economic reality” of the relationship between the worker and the potential employer. It went into effect on March 11th. 

What Came Before

The new rule first and foremost rescinds a 2021 rule defining the term, which was the first attempt to formally define an independent contractor by regulation. The DOL had instead issued informal guidance, Fact Sheet 13, which set out seven factors to be considered in determining worker classification. These factors were only guidelines, however, and final determination was still controlled by the unique circumstances of each relationship. The DOL proposed a two-part test that initially looked at two factors – “[t]he nature and degree of the worker’s control over the work; and the worker’s opportunity for profit or loss based on initiative, investment, or both.” If these two factors aren’t determinative, the test then looked to three other factors – the skill required for the work, the permanence of the relationship, and the degree that the work was integrated into the principal’s operation.

The new rule was finalized in January 2021, before immediately facing an unsuccessful attempt at withdrawal by the new administration shortly thereafter. A federal district court held the rule to remain in effect in a lawsuit that is still pending in the U.S. Court of Appeals for the Fifth Circuit.

A New Rule

A new proposed rule was released in October 2022, proposing a full six-factor test to determine the “economic reality” of the relationship. The final rule tracks the proposed rule significantly, so there is very little surprise as to the published criteria. 

The six factors of the new “economic reality” test are:

1. Opportunity for profit or loss depending on managerial skill
2. Investments by the worker and the potential employer
3. Degree of permanence of the work relationship
4. Nature and degree of control
5. Extent to which the work performed is an integral part of the potential employer's business
6. Skill and initiative

According to the DOL, “economic dependence is the ultimate inquiry, meaning that a worker is an independent contractor as opposed to an employee under the Act if the worker is, as a matter of economic reality, in business for themself.” The rule once again is closer to a “totality of the circumstances” determination rather than giving specific factors a specific weight in a formula. Also, these factors are not necessarily exhaustive – there may be additional factors to consider, so there is considerable leeway in the new rule.

Employers (and potential employers!) should pay close attention to the provisions of the new rule, which took effect on March 11, 2024. They differ greatly from the 2021 rule and even Fact Sheet 13. Now is the time to reevaluate worker classification policies in a careful and thorough manner – the new rule is, despite several pending legal and legislative challenges, the standard for compliance. For more information about how the new rule will affect worker classification or assistance with evaluating worker classification policies, contact the attorneys at McBrayer.

Jason R. Hollon is a Member of McBrayer law. His law practice primarily focuses in the areas of employment law, employment litigation, civil investigations and estate and trust litigation. He is in the firm's Lexington office and can be reached at jhollon@mcbrayerfirm.com or at (859) 231-8780, ext. 1147.

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This article does not constitute legal advice.