DOL Issues FINAL RULE for Examining Independent Contractor v. Employee Status
It is official! The Department of Labor (“DOL”) has finally issued the FINAL RULE on how to determine whether any given worker should be classified as an employee or as an independent contractor. And while the Final Rule is not nearly as illuminating as we had hoped, at long last we have a definitive standard to work with for the next several years.
First, we’ll give you the Final Rule straight from the (proverbial) horse’s mouth. Per DOL’s announcement on January 9, 2024:
“This final rule continues to affirm that a worker is not an independent contractor if they are, as matter of economic reality, economically dependent on an employer for work. Consistent with judicial precedent and the Department’s interpretive guidance prior to 2021, the final rule applies the following six factors to analyze employee or independent contractor status under the FLSA:
opportunity for profit or loss depending on managerial skill;
investments by the worker and the potential employer;
degree of permanence of the work relationship;
nature and degree of control;
extent to which the work performed is an integral part of the potential employer’s business; and
skill and initiative.”
Seem familiar? If you’re a regular reader of these updates, it likely will seem very familiar because this is literally just the pre-2021 independent contractor standard re-implemented. The good news is that most employers are familiar with this pre-2021 standard as the overwhelming majority of employers – and employment attorneys - have worked with this standard for many years now. The bad news is that this is the very same standard that has allowed for – if not outright facilitated at times – worker misclassification being among the most heavily-litigated issues in the arena of employment law.
That said, we are at least thankful that the bizarre, unwieldy, and mercifully short-lived 2021 standard has been retired, as it was every bit as ambiguous as the new (old) standard, yet somehow more difficult to actually apply.
In addition to re-implementing the old six-weighted-factor standard, the DOL has taken this opportunity to clarify certain points, most of which serve as a rebuttal to the 2021 standard. First and foremost among them is that this is a weighted factor test and not an elemental test. An elemental test is all-or-nothing; in an elemental test, you would need to satisfy all six elements, or you might as well have satisfied none. In a weighted factor test, by contrast, you put each factor on a scale, and see which side comes out heavier. So, in the case of worker classification, if four factors land on “employee” and two land of “contractor,” then “contractor” is the appropriate classification. Easy-peasy! Except…
It doesn’t take a legal scholar to see the problem here: there are an even number of factors, meaning that ties are inevitable. And what happens in the event of a tie? The DOL advises that you consider “additional factors” which “may be relevant if such factors in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work (i.e., an employee under the FLSA).”
Reasonable minds could easily disagree as to on which side of the scale any given factor should fall, even regarding relatively routine, uncomplicated classification issues. Throw undefined “additional factors” into the mix, and litigation is inevitable. On top of that, the DOL has also stressed that “no particular factor is afforded more weight than any other,” which precludes employers from breaking a tie by ranking factors in order of importance.
To be fair to the DOL, the issue of appropriate worker classification defies simplification; this just isn’t something that the average person will be able to easily solve via a Google search, no matter how smart or savvy they might be within their own field of expertise. There are little things that courts consider that even the DOL has failed to address in its various FAQ’s and press releases. By way of example: did you know that a non-competition provision in an independent contractor agreement can usually convert someone who otherwise would have been appropriately classified as a contractor into a full-fledged employee? Unless, of course, you’re dealing with one of dozens of industries that allow for such clauses, e.g., real estate, which specifically allows contractors to be bound by non-competition agreements, not for any nuanced legal reason, but simply out of cultural inertia - or aggressive lobbying.
There are countless examples of exceptions within exceptions just like this in the world of labor and employment law. Unfortunately, no matter how well the DOL drafted their new (old) standard, there’s just no way any rule could account for the decades of caselaw governing the issue of appropriate worker classification. Another why Google is no exception for qualified legal advice.