DOL Issues Final Independent Contractor Rule

by Michelle White

With an effective date of March 11, 2024, the Department of Labor (“DOL”) issued its long-awaited final rule addressing independent contractor classification under the Fair Labor Standards Act (“FLSA”). See Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 89 Fed. Reg. 1638 (Jan. 10, 2024) (to be codified at 29 C.F.R. pts. 780, 788, 795). The FLSA provides legal protections for employees, as opposed to independent contractors or volunteers; however, the FLSA does not provide a method to distinguish independent contractors from employees.

Historically, courts have used a multi-factor economic reality test to differentiate between independent contractors and employees, which the DOL supported in informal guidance. While courts varied in the number and weight of factors considered, most courts reviewed relationships on a case-by-case basis by considering:

1. Worker’s opportunity for profit or loss;
2. Investments in equipment or materials by the worker and the employer;
3. Degree of permanence and duration of the work relationship;
4. Nature and degree of control over the manner in which work is performed;
5. Degree to which the work performed is integral to the employer’s business; and
6. Whether the work requires special skills and initiative. Id. at 1641–44.

In 2021, the DOL published a final rule with a new five-factor test. Id. at 1644–45. This new business friendly test primarily considered two core factors—the worker’s opportunity for profit or loss and the nature and degree of control exercised by the employer. When these factors produced an unclear result, the analysis moved to three guidepost factors—the relationship’s length or permanence, the worker’s special skills, and the work’s integration into the principal’s operations. With the concurrent change in administration, the DOL attempted to delay and withdraw the rule days after the final rule was published, but these actions were rejected as violations of the Administrative Procedure Act. Id. at 1645.

In October 2022, the DOL proposed a new rule to rescind the 2021 rule and replace it with a return to a “totality of the circumstances” test. Id. The proposed rule, which has almost uniformly been described as tending towards a determination that the worker is an employee rather than an independent contractor, became effective on March 11, 2024. The “totality of the circumstances” test considers the six factors of the economic reality test (described above) while allowing other relevant factors to be considered. The new rule further clarified these factors and provided examples to illustrate their applicability.

Several challenges to the rule have been filed claiming the rule broadly classifies workers as employees, the rulemaking was outside the scope of DOL authority, and the rule is arbitrary and capricious in violation of the Administrative Procedures Act. See Complaint in Frisard’s Transp., LLC v. DOL, 2:24-CV-347 (E.D. La., filed Feb. 8, 2024). Freelance workers have also challenged the rulemaking alleging similar violations while further seeking to “vindicate the right of individual entrepreneurs to remain independent in the face of a concerted effort to force them into employment relationships they neither want nor need.” Complaint in Warren, et al. v. Su, 2:24-CV-0007 (N.D. Ga., filed Jan. 16, 2024); see also Complaint, Littman and Chesak v. DOL, 3:24-CV-194 (M.D. Tenn., filed Feb. 21, 2024).

Additionally, Congressional Review Act Resolutions have been introduced in both the Senate and the House of Representatives. H.R.J.Res. 116, 118th Cong. (Mar. 6, 2024); S.J.Res. 63, 118th Cong. (Mar. 6, 2024). This process would require both houses of Congress to approve a joint resolution of disapproval, and the President would be required to sign the joint resolution. If vetoed, Congress can vote to override the veto. If this lengthy process is successful, the rule would be unenforceable.

Despite the many legal challenges, the rule has not been enjoined or invalidated, and the new independent contractor rule became effective March 11, 2024. While these many legal challenges are pending, the rule remains in effect.

Employers with independent contractors should carefully review the circumstances of each independent contractor agreement to ensure appropriate classification under the final rule. Any agreements that do not meet the test under the final rule will need to be carefully evaluated to determine appropriate changes, including reclassification to employees, if necessary.

This article was prepared by Michelle White, an Associate in the Firm’s Employment Law Practice Group, with the assistance of Apurva Gunturu, a Law Clerk with the Firm. If you have any questions related to this article or other employment law matters, please contact Michelle White at 512.322.5821 or mwhite@lglawfirm.com.