KMK Law Management Rights Blog

On January 9, 2024, the Department of Labor announced that the changes to its independent contractor rule under the Fair Labor Standards Act (FLSA) which were proposed last year will go into effect starting March 11, 2024. This new standard rescinds the independent contractor status rule announced in 2021, reverting back to the Department of Labor’s previous interpretation.

Properly classifying workers as independent contractors versus employees can cause some significant headaches for employers. The test to determine whether a worker is properly classified as an independent contractor versus an employee can differ depending on which government entity is looking, whether it be the Department of Labor, the Internal Revenue Service, or a state workers’ compensation agency. What is consistent however, is that there is never a bright-line rule that clearly designates an employee one way or the other—there is always a balancing of factors.

For its part, the Department of Labor has long applied an economic realities test, examining the realities of the employment relationship and identifying whether the workers depend on someone else’s business or were in business for themselves. Though it had never promulgated generally applicable regulations on independent contractor classification, through a series of industry-specific regulations as well as subregulatory guidance, the Department identified a series of economic realities examined when determining whether a worker was an independent contractor. 

The Department analyzed:

1. the extent to which the work performed is an integral part of the employer's business;
2. the worker's opportunity for profit or loss depending on their managerial skill;
3. the extent of the relative investments of the employer and the worker;
4. whether the work performed requires special skills and initiative;
5. the permanency of the relationship; and
6. the degree of control exercised or retained by the employer. 

The Department consistently emphasized, however, that none of these factors controlled, and each were weighed equally with the others.

Perhaps unsurprisingly, an analysis dependent upon an individual regulator’s balancing of six equally-weighted factors created confusion for employers, who would often not expect what might be the determining factor in a specific situation. In an effort to clarify this confusion the Department passed the 2021 IC Rule, which for the first time sought to apply a general independent contractor standard across all industries. The 2021 IC Rule did not do away with the economic realities test, but rather identified two core factors—the nature and degree of the individual’s control over the work as well as the individual’s opportunity for profit or loss—as being most probative and therefore afforded greater weight in the Department’s analysis.   

While some credited the 2021 IC Rule with clarifying the regulatory standard others criticized the rule for departing from historical precedent, suggesting it may lead to further worker misclassification. Accordingly, the Biden Administration announced its opposition to the 2021 IC Rule, proposing its elimination. After making its way through the regulatory process, that change is set to go into effect March 11, 2024. As of that day, the 2021 IC Rule is rescinded, and the traditional economic realities test—in which no factor is weighed more heavily than another—will be reinstated. 

It is common, however, for new rules with this type of impact to be challenged in court. In fact, when the Department first announced its intent to withdraw the 2021 IC Rule (as opposed to changing the rule through the formal rulemaking process), that action was met with a lawsuit which vacated the withdrawal. That lawsuit has been stayed by the Fifth Circuit Court of Appeals as the Department developed its final rule, but with the Department’s announcement the case will likely resume, focusing on the merits of the new rule. This challenge as well as others may impact the Department’s ability to enforce its new rule come March.    

Practically speaking, employers should use this announcement as an opportunity to review any independent contractor relationships they have in order to ensure the relationship would withstand the new scrutiny imposed by the Department’s new rule, as well as standards imposed by other agencies. Remember, it is not how a relationship is described in theory, but how the relationship exists in practice that will determine whether an individual is properly classified as an independent contractor as opposed to an employee. Please contact a member of KMK’s Labor and Employment Practice Group for assistance in ensuring your workers are properly classified.