Understanding The New Rule Affecting Independent Contractors

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new rule affecting independent contractors

In this increasingly confusing world, it is certainly rare when some area of life becomes simpler, clearer, or less perplexing. But in a small way, that is just what has happened in one smaller corner of the legal landscape with the adoption of a new rule by the U.S. Department of Labor (DOL) clarifying when workers are properly considered independent contractors as opposed to employees.

Why Do Independent Contractors Need a New Rule?

Congress enacted the Fair Labor Standards Act in 1938 to eliminate “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.” The two fundamental requirements of the FLSA are that covered employers must pay nonexempt employees at least the federal minimum wage for all hours worked and at least one and one-half the employee’s regular rate of pay for every hour worked over 40 in a workweek. The Act also requires covered employers to maintain time and pay records and prohibits employers from retaliating against employees for complaining about their pay.

The FLSA’s protections do not, however, apply to independent contractors and employers have commonly sought to shield themselves from complying with the FLSA by classifying employees, often improperly, as independent contractors. As Acting Secretary of Labor Julie Su explains, “Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections.” It is well-established that merely slapping an “independent contractor” label on a worker’s position or on an agreement with a worker does not make the worker an independent contractor. Nonetheless, an enormous amount of litigation has arisen from the essential ambiguity of the term “independent contractors.” Frustratingly, the DOL’s guidance on this issue has shifted from year to year and Administration to Administration.

Most notably, in 2021, in an abortive attempt to bring greater clarity to this area of the law, the DOL adopted a rule which narrowed the factors to be included in the independent contractor analysis and described in some detail the relative weight given to these factors. Before this rule went into effect, however, the Department suspended the new rule, and then ultimately rescinded it, determining that the rule was not fully consistent with the FLSA’s text and purpose. As a result, employers and employees were left with no meaningful guidance from the Department as to how to navigate the independent contractor minefield for a period of almost three years.

What is the New Rule Affecting Independent Contractors?

The Department of Labor’s long-awaited new rule affecting independent contractors seeks to bring much needed clarity to this area of the law. According to Secretary Su, “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.” The Rule, which goes into effect on March 11, 2024, defines “independent contractors” as workers who, as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves. Under this interpretation, “independent contractor” is largely synonymous with “self-employed person” or “freelancer” and is distinct from an “employee.”

This interpretation is intended to embrace and codify the multi-factor “economic reality test” as adopted by most courts in this country in the last several decades in determining whether a worker is an employee or independent contractor. The essential question addressed by this test is whether a worker is economically dependent on the employer for work (and is thus an employee) or is in business for him or herself (and is thus an independent contractor). The new rule adopts the “totality-of-the-circumstances” analysis long utilized by the courts in assessing a worker’s economic dependence on an employer. This analysis considers multiple factors with no factor or factors having predetermined weight. These factors include any opportunity for profit or loss a worker might have; the financial stake and nature of any resources a worker has invested in the work; the degree of permanence of the work relationship; the degree of control an employer has over the person’s work; whether the work the person does is essential to the employer’s business; and a factor regarding the worker’s skill and initiative.

The new Rule also states that “additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA[.]” The DOL included this provision to emphasize that “the [above] enumerated factors are not to be applied mechanically but viewed along with any other relevant facts in light of whether they indicate economic dependence or independence.”

While the new rule is not binding legal authority, it will inevitably be cited by the DOL, and courts as persuasive authority for determining a worker’s status and eligibility for minimum wage and overtime pay under the FLSA.

Does the Department of Labor’s new rule really make things clearer?

Well, yes, in that any rule is clearer than no rule. And in that the Rule is largely consistent with court precedence. But, the determination of independent contractor status remains enormously complicated, subjective, and fact-specific, just as it always has been and probably always will be. Employers are thus cautioned to seek legal guidance in classifying any employee as an independent contractor. Likewise, workers who are not unambiguously in business for themselves and who are being classified as independent contractors should seek legal advice on whether they are being properly compensated. Just calling someone an independent contractor doesn’t make them one!

Please contact us if you believe that you or someone you know is currently being misclassified.

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