On January 10, the U.S. Department of Labor (DOL) issued its long-anticipated final rule formally revising its guidelines for classifying workers as employees or independent contractors under the federal Fair Labor Standards Act (FLSA). The final rule, which takes effect on March 11, comes nearly a year and a half after the DOL originally proposed to revise its independent contractor classification guidelines in October 2022.
As an initial step, the final rule formally rescinds the DOL’s prior independent contractor rule that was issued in early January 2021 during the final days of the Trump administration. While the Trump-era rule prioritized two “core factors” for evaluating a worker’s status as an employee or independent contractor – the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss – the final rule now deploys a “totality of the circumstances” approach for this assessment. The ultimate question is whether, as a matter of economic reality, the worker is economically dependent on the potential employer or is in business for themself.
According to the final rule, employers should consider six different factors when determining whether a worker is an employee or independent contractor:
- The worker’s opportunity for profit or loss depending on managerial skill. This factor asks whether the worker can gain profit or suffer loss based on such things as initiative or business judgment that impact the worker’s economic success in performing the work.
- The investments made by the worker and the potential employer. According to the DOL, this factor considers whether the worker makes any “capital or entrepreneurial” investments and whether these investments are similar to those made by the potential employer.
- The degree of permanence of the working relationship. This factor evaluates whether the working relationship is indefinite or for a defined term, as well as if the worker is able to perform work for multiple entities at the same time.
- The nature and degree of the potential employer’s control. This factor assesses the level of control that the potential employer may exercise (even if it does not actually do so) over the performance of the work. Importantly, this does not include employer control exercised solely for purposes of legal compliance.
- The extent to which the work performed is an “integral part” of the potential employer’s business. This factor considers whether the work performed is “critical, necessary, or central to the potential employer’s principal business.”
- The level of skill and initiative required to perform the work. This factor asks whether the worker uses specialized skills in performing the work and those skills are used in connection with “business-like initiative.”
For each factor, both the final rule and the DOL outline additional questions and considerations that employers should make when evaluating their worker relationships. According to the DOL, however, no single factor is dispositive in determining whether a worker is an employee or independent contractor, nor are the six factors considered to be exhaustive. Instead, employers are expected to consider the totality of the circumstances on a case-by-case basis to determine whether a worker should be classified as an employee or independent contractor. In doing so, employers may consider additional factors if they shed light on whether a worker is economically dependent on the employer or is in business for themself.
Moving forward, the final rule sets the new guidelines under which the DOL will analyze worker classification for purposes of the FLSA, including in response to worker misclassification complaints. Whether federal courts choose to follow the final rule in FLSA lawsuits is a different question, as the rule itself is not binding on the courts and most federal circuits already have their own independent contractor tests based on case law precedent. As a result, the final rule could create compliance headaches for businesses that rely on independent contractors or contract workers in their day-to-day operations, as they may now be forced to balance different standards and analyses to properly classify workers and avoid FLSA investigations and lawsuits.
The transportation industry provides a prime example of the final rule’s potential industry impact.
Many commercial truck drivers on the road today are owner-operators who own or finance the truck they drive and haul freight under their own authority. As owner-operators, these drivers have historically been classified as independent contractors under the FLSA. Several trade groups and associations have already predicted that the final rule will diminish owner-operators’ ability to remain independent and flexible in choosing their own hours and routes. Likely realizing this potential effect, the DOL addressed in the final rule how some of these factors will impact a driver’s classification as an employee or independent contractor.
For example, the second factor asks whether the worker makes any “capital or entrepreneurial” investments and whether these investments are similar to those made by the potential employer. According to the DOL, an employer-sponsored lease for a truck is not the kind of investment that supports classification as an independent contractor. However, simply because a driver is offered an employer-sponsored lease does not itself mean that the worker must be classified as an “employee” under the FLSA. For example, whether the driver has a choice in accepting the employer-sponsored lease, whether the driver can consider independent financing options, whether the employer requires the driver to work for a minimum amount of time, and whether the lease ultimately leads to the driver’s ownership of the truck are all factors that would help determine whether the driver should be classified as an independent contractor or employee under the FLSA.
In the final rule, the DOL also added that a qualitative comparison of a worker’s investments with the employer’s investments is a better indicator of whether the worker is economically dependent on the employer for work, or whether the worker is in business for themself. For example, while a driver who owns or finances a single truck makes a qualitatively smaller investment than an employer with a fleet of trucks, the driver’s investment allows them to operate independently. Such a comparison would suggest support for independent contractor status rather than employee classification.
As noted above, the sixth factor described in the final rule looks to whether the worker uses specialized skills to perform the work and whether those skills are used in connection with “business-like initiative.” In response to industry commentary, the DOL agrees that truck driving and the possession of a commercial drivers’ license (CDL) “would indicate independent contractor status for a worker who uses truck-driver skills in connection with business-like initiative.” This is because of the “distinctive nature” of a CDL and because drivers with a CDL are using a more specialized set of skills than drivers without one. Still, simply because a driver has and uses a CDL is not dispositive as to whether the driver is correctly classified as an independent contractor or employee. Whether the driver uses the CDL in connection with business-like initiative would be more determinative as to the worker’s status.
The potential impact on the transportation industry highlights the new compliance hurdles that many employers will likely face once the final rule goes into effect. Since March 11 is fast approaching, employers across all industries should take steps to reevaluate their existing independent contractor relationships to determine if these workers are properly classified under the new totality of the circumstances approach imposed by the final rule. To avoid any compliance speed bumps in this process, employers should also seek legal counsel for any classification questions or concerns.
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