The Department of Labor’s Wage and Hour Division this week released a new rule that would change how employees and independent contractors are classified.
The new rule, which does not specify a particular industry or type of work, defines an employee as “workers who, as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves. Such workers play an important role in the economy and are commonly referred to by different names, including independent contractor, self-employed, and freelancer.”
DOL in the Trump administration finalized an independent contractor rule just after the 2020 election, which came into effect in March 2021. The Biden administration attempted to withdraw the rule in May 2021, but a federal court put it back into effect and claimed that the proposed withdrawal violated the Administrative Procedure Act.
DOL’s rule announced this week will rescind that rule and instead reinstates a multi-factor, “totality of the circumstances” test to determine whether a worker should be considered an employee or an independent contractor. The factors DOL will now consider include:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanency of the relationship.
- The amount of the alleged contractor’s investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor’s opportunities for profit and loss.
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.
Per the rule, one of the “integral factors” of the variety of test factors set by the Agency is whether the “work performed” is an integral part of the employer’s business rather than a part of an integrated unit of production. Other aspects such as scheduling, remote supervision, price setting, and the ability to work for others are being considered under the rule.
The rule does not utilize the “ABC test” to determine a worker’s status, despite the proposed version of the rule including the ABC test. That test is used by the state of California to determine a worker’s status and is viewed as making it significantly more difficult to classify a worker as an independent contractor than other tests.
The final rule was published in the Federal Register on Wednesday, Jan. 10, and is slated to take effect March 11, 2024.
