New Independent Contractor Rule Set to Take Effect on March 11, 2024
The U.S. Department of Labor's new rule for analyzing and determining who is an employee or independent contractor under the Fair Labor Standards Act (FLSA) takes effect on March 11, 2024. The distinction between "employees" and "independent contractors" is significant because employers must comply with the federal rules for minimum wage, overtime and record-keeping set forth in the FLSA when a worker is an employee, but not when the worker is an independent contractor. Employers who use or are considering using 1099 independent contractors should become familiar with the new rule to ensure such workers are properly classified.
Background: For decades, courts have used what has become known as the "economic realities" test to determine whether a worker is an employee or an independent contractor under the FLSA. While courts have had slightly varied approaches, the economic realities test requires employers to analyze multiple factors considering the totality-of-the-circumstances. In January 2021, Former President Donald Trump's administration promulgated an independent contractor rule which instructed courts to focus on two factors: (1) the nature and degree of the worker’s control over the work, and (2) the worker’s opportunity for profit or loss. If both factors pointed in the same direction, the analysis ended under this rule. Significantly, the January 2021 rule was the first time the DOL had ever adopted a formal independent contractor rule. After President Joe Biden took office, his administration delayed enforcing the January 2021 rule and litigation ensued.
2024 Rule: The new 2024 independent contractor rule effectively rescinds and replaces the January 2021 rule. It seeks to return to the multi-factor totality-of-the-circumstances analysis. The 2024 rule provides six factors that should be considered:
(1) The worker’s opportunity for profit or loss;
(2) The investments by the worker and the potential employer, such as equipment or materials required for the task;
(3) The degree of permanence of the working relationship;
(4) The nature and degree of the worker's control over the work;
(5) The extent to which the work performed is an integral part of the potential employer’s business; and
(6) The amount of skill and initiative required for the work.
Contrary to the January 2021 rule, no one factor or subset of factors is determinative. The DOL instructs that “the weight given to each factor may depend on the facts and circumstances of the particular relationship.” Additional factors can be considered “if they in some way indicate if the worker is in business for themselves as opposed to being economically dependent on the employer for work.”
Next Steps: While the new rule is presently being challenged through court action and congressional attempts to overturn it, DOL investigators are likely to treat the new 2024 rule as the controlling standard. A finding of worker misclassification can result in expensive penalties for employers, such as back pay for unpaid overtime and minimum wage, liquidated damages and attorneys’ fees. Therefore, employers should consider the impact of the 2024 rule on their workers presently classified and treated as independent contractors. While this new rule may not be a significant departure from past interpretations, it is a good reminder for employers to evaluate the treatment of independent contractors.
The DOL’s 2024 independent contractor rule and related resources are available here. If you have any questions about the 2024 rule, the independent contractor analysis, or any other wage and hour issue, please contact the MacDonald, Illig, Jones & Britton LLP Labor & Employment team.
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