U.S. Department of Labor Issues New Final Rule for Classifying Independent Contractors, Effective March 11, 2024

By Joshua R. Woodard, Clint S. Engleson, Marian Zapata-Rossa, Tyler V. Thomas, and Sandra L. Jonas

On January 10, 2024, the U.S. Department of Labor (“DOL”) published a final rule that imposes a new, six-factor test (see below) for determining whether workers are “independent contractors.” The final rule takes effect on March 11, 2024, and will generally make it more difficult for businesses to classify workers as independent contractors, rather than employees.

The DOL’s new rule assigns equal weight to each of its six factors, and no one factor is determinative. The purpose of the test is to determine whether, as a matter of “economic reality,” a worker is economically dependent on a potential employer for work or in business for themselves based on the “totality of the circumstances” of each individual case. If they are economically dependent, they are an employee. Otherwise, they may be classified as an independent contractor.

The DOL’s new rule rescinds the prior 2021 independent contractor rule, which considered a multi-factor test to determine whether a worker was economically dependent on an employer, but gave greater weight to two “core elements”: the nature and degree of control over the work, and the individual’s opportunity for profit and loss. The prior 2021 independent contractor rule also did not consider a worker’s investment or whether the work was integral to the employer’s business as separate factors.

The DOL’s new rule includes the following six factors:

1. The worker’s opportunity for profit or loss, depending on managerial skill. This factor assesses whether a worker can increase profits through their efforts and negotiations with the potential employer. If they can, this factor weighs in favor of independent contractor status. The DOL provides examples of the kinds of inquiries that may be helpful in deciding this factor, including: “whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space."¹'
2. Investments by the worker and potential employer. Here, the inquiry is whether the worker is making similar types of capital and entrepreneurial investments in the work as the potential employer. The test is not whether the worker matches or exceeds the potential employer’s investments on a dollar-for-dollar basis, but whether they are making “similar types of investments” that “suggest the worker is operating independently."² For example, the DOL makes a distinction between costs a potential employer “imposes” on a worker and those costs the worker invests in their business.³ Where a worker invests in tools and equipment that allow them to work for multiple companies, they are more likely to be an independent contractor. By contrast, if a company requires a worker to purchase tools and equipment that have little use in the wider market, this is not considered an investment in the worker’s business.
3. The degree of permanence of the relationship. For this factor, the more permanent, continuous, or open-ended the relationship, the more likely the worker is an employee. The DOL notes that a worker is more likely to be an independent contractor when the “work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities."⁴ The DOL also clarified that independent contractors may have “regularly occurring fixed periods of work,” but that “the seasonal or temporary nature of work by itself would not necessarily indicate independent contractor classification."⁵ In other words, just because an employer unilaterally dictates a sporadic working relationship, this does not mean the worker is an independent contractor. Instead, the worker must have some say in the matter.
4. The nature and degree of the potential employer’s control over the work. This factor assesses the potential employer’s control over the worker, including both actual and “reserved” control. “Reserved” control means control the potential employer could exert, even if it never does. The greater the degree of control, the more likely the worker is an employee. Relevant inquiries include “whether the potential employer sets the worker’s schedule, supervises the performance of the work, or explicitly limits the worker’s ability to work for others."⁶ The new rule also considers whether the potential employer “controls economic aspects of the working relationship,” including “control over prices or rates for services and the marketing of the services or products provided by the worker."⁷ The rule carves out actions taken by the potential employer “for the sole purpose of complying with specific, applicable federal, state, tribal, or local law or regulation,” noting that such actions “are not indicative of control."⁸ However, this carve out does not extend to compliance with the potential employer’s own “safety, quality control, or contractual or customer service standards."⁹
5. The extent to which the work performed is an integral part of the potential employer’s business. Where the work performed is “critical, necessary, or central to the potential employer’s principal business,” this factor weighs in favor of employee status.¹⁰ As the DOL summarizes, “if a potential employer’s primary business is to make a product or provide a service, then the workers who are involved in making the product or providing the service are performing work that is integral to the potential employer’s business."¹¹ Similar to the ABC test’s infamous “Prong B,” companies may have difficulty establishing that a given worker does not provide services integral to their business. However, unlike the ABC test, this factor is not dispositive, but must be weighed equally with the other five factors.
6. The worker’s skill and initiative. Under this factor, the more specialized the worker’s skills, the more likely they are to be an independent contractor. As the DOL notes, this factor ''indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work."¹² However, even where the worker “brings specialized skills to the work relationship, this fact is not itself indicative of independent contractor status because both employees and independent contractors may be skilled workers."¹³ Rather, it is the “worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor."¹⁴

Notably, this list of factors is non-exhaustive. Other “additional factors” may be considered so long as they “in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work."¹⁵

Practical Take-Aways

The DOL appears to have followed the trend that many states have adopted over the last decade – namely, implementing a test that makes it more difficult for companies to classify workers as independent contractors. Prior to March 11, 2024, companies may want to carefully evaluate each worker providing independent contractor services by applying all six factors to ensure such worker has been properly classified, as well as review and ensure compliance with applicable state laws. Companies may also want to review their independent contractor agreements and policies and practices relating to independent contractors to ensure consistency with the DOL’s new rule.

Because the DOL will assign equal weight to each new factor, companies who have met all six factors are likely to have a much better argument that the workers have been properly classified under the DOL’s new rule. Given some of the ambiguities in the DOL’s six factors and the risks of misclassifications (including, without limitation, minimum wage and overtime issues; benefits issues; workers’ compensation issues; employment tax issues; and other issues), companies may want to seek counsel to assist with the evaluation of its independent contractors.