New DOL Rule Changes Definition Of IC Status: What Matters for Your Enterprise

By Nathan Gibson | January 10, 2024

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Key Points

The economic realities test is the test for determining if a worker is an employee or independent contractor.

The new independent contractor rule, that goes into effect on March 11, 2024, sets forth 6 factors to be considered.

When evaluating a compliance vendor, taking into account their policies, procedures, and readiness to discuss changes such as this recent ruling are of paramount importance.

On January 9, 2024, the United States Department of Labor (DOL) announced its final rule on determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA) purposes. The rule is effective on March 11, 2024, and rescinds the existing rule developed by the previous administration that has been in effect since 2021. The new rule says that several factors will be considered, and that the totality of the circumstances will determine the classification.

A Brief Timeline/Background

The economic realities test is the test for determining if a worker is an employee or independent contractor.

In the past 10 years, the DOL has issued multiple versions of an independent contractor rule/guidance all of which are based on the economic realities test adopted by the United States Supreme Court almost eighty years ago. If a worker is economically dependent on the hiring entity, then the worker is an employee. If the worker is economically independent of the hiring entity, then the worker is an independent contractor. The economic realities test as stated by the DOL over the years:

 

  Description of the Economic Realities Test
2014 DOL Fact Sheet Workers who are economically dependent on the business of the employer, regardless of skill level, are considered to be employees, and most workers are employees. On the other hand, independent contractors are workers with economic independence who are in business for themselves.
2015 Obama Administration’s Interpretation The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for him or herself.  If the worker is economically dependent on the employer, then the worker is an employee.  If the worker is in business for him or herself (i.e., economically independent from the employer), then the worker is an independent contractor.
2021 Trump DOL rule An employer suffers or permits an individual to work as an employee if, as a matter of economic reality, the individual is economically dependent on that employer for work…An individual is an independent contractor, as distinguished from an “employee” under the Act, if the individual is, as a matter of economic reality, in business for him- or herself.
2024 Biden DOL Rule The Act’s definitions are meant to encompass as employees all workers who, as a matter of economic reality, are economically dependent on an employer for work. A worker is an independent contractor, as distinguished from an “employee” under the Act, if the worker is, as a matter of economic reality, in business for themself.

 

Everyone largely agrees on the factors to be considered.

The DOL’s rules/guidance consider, in some form, the same factors. The Trump DOL rule elevated two factors to be core factors and relegated three to being additional factors, but in general, the factors remain relatively the same – different rules do not add different factors. In the rules, there are nuances in how the factors are described, which may have an effect in some cases – for example, one version may say that a worker’s managerial skill affects their opportunity for profit or loss, while another version might say that a worker’s managerial skill has the opportunity for profit or loss. The principal factor (the worker’s managerial skills affecting their profit and loss) remains the same, but the precise language may differ and these nuances are not likely to have a material effect in most cases. These are the factors to be considered when classifying workers as employees or independent contractors and whether they are included in the DOL’s guidance.

 

Factor 2014 DOL Fact Sheet Obama DOL 2015 Administrator’s Interpretation 2021 Trump DOL rule 2024 Biden DOL Rule
1) The extent to which the work performed is an integral part of the employer’s business. Yes Yes Additional Factor Yes
2) Whether the worker’s managerial skills affect their opportunity for profit and loss Yes Yes Core Factor Yes
3) The relative investments in facilities and equipment by the worker and the employer Yes Yes Yes
4) The worker’s skill and initiative Yes Yes Additional Factor Yes
5) The permanency of the worker’s relationship with the employer Yes Yes Additional Factor Yes
6) The nature and degree of control by the employer Yes Yes Core Factor Yes
7) Additional Factors Yes

 

The NEW 2024 Biden DOL Independent Contractor Rule

The new independent contractor rule sets forth 6 factors to be considered:

(1) Opportunity for profit or loss depending on managerial skill.

(2) Investments by the worker and the 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 employer’s business.

(6) Skill and initiative.

These are not new factors. It is likely that the Biden DOL will interpret the factors in favor of classifying workers as employees, but the Biden DOL would also have interpreted the factors in the old rule in favor of classifying workers as employees. The new rule adds a wild card by including the opportunity for additional factors to be considered. The new rule includes:

(7) Additional factors.

Additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the employer for work.

The rule says the factors are “tools or guides to conduct a totality-of-the-circumstances analysis. This means that the outcome of the analysis does not depend on isolated factors but rather upon the circumstances of the whole activity to answer the question of whether the worker is economically dependent on the employer for work or is in business for themself.’” The totality of circumstances approach allows workers to be classified as independent contractors if factors strongly point to independence, even if other factors are less determinative. For example, a college professor may be a world-renowned expert and work as a consultant in addition to their job as a professor. Based on his/her being an expert, the totality of circumstances may indicate independence even if the professor has not made material investments in their business, may not have an opportunity for profit or loss, or may consult on a matter that is integral to the employer’s business. The totality of circumstances allows more flexibility when classifying workers than a standard that requires meeting specific standards.

What Does this Mean for Your Enterprise?

Compliance is a critical part of any independent contractor engagement program and should be a primary consideration when choosing your preferred solution provider. When evaluating a compliance solution provider, taking into account their policies, procedures, and readiness to discuss changes such as this recent ruling are of paramount importance.

With MBO, You’re Covered

For more than 25 years, MBO Partners has led the charge in ensuring our clients are compliantly and efficiently engaging independent contractors. Our organization closely follows all changes in rules and regulations and has been intently monitoring the changes in the DOL’s approach to independent contractor classification, which has undergone significant revision and re-interpretation throughout the past several administrations.

While this brief update does not constitute legal advice, we are happy to set up a custom consultation upon request to clarify further how this might impact your enterprise.

 

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