On March 11th, 2024, the New Rule officially took effect.
The “New Rule” is the revised test that the Department of Labor (DOL) will use to analyze whether a worker should be classified as an employee or an independent contractor.
Categorizing a worker as an employee or an independent contractor has financial and other human resource implications for employers. For example, if a worker is classified as an independent contractor, the employer can avoid certain costs such as workers’ compensation insurance, 401k matches, and other administrative costs associated with hiring an employee. As a result, employers often try to classify workers as independent contractors even though the true substance of the working relationship is that of an employer-employee affiliation.
Further, if a service provider is classified as an independent contractor and not an employee, he is not protected by the Fair Labor Standards Act (FLSA), which establishes minimum wage and overtime pay standards.
Unfortunately for employers, the test that courts use to determine employee status has not always been clear and has largely hinged on which political party occupies the White House.
Currently, under the Biden administration, the DOL is trying to provide some predictability regarding employee status disputes via the introduction of the New Rule. The New Rule was originally proposed in 2022 with the goal of a May 2023 release date. However, after receiving more than 55,000 public comments—which, by law, the DOL is required to consider when undergoing rule modifications and proposals—caused the rule’s release to be delayed. On January 8th, 2024, the DOL’s Acting Secretary, Julie Su, announced the release of the New Rule.
The New Rule is a balancing test that considers the following seven factors:
- 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.
- Skill and initiative.
- Additional factors.
The New Rule mostly mirrors what is known as the Economics Realties Test (ERT) that was established through decades of case law. The original ERT was a six-factor test consisting of the first six factors considered under the New Rule.
However, in 2021, the DOL under the Trump Administration simplified the ERT by focusing primarily on (1) the extent of the worker’s opportunity for profit or loss and (2) the nature and degree of control that the employer has over the work being performed by the worker. The DOL’s simplified test established in 2021 was thought to be favorable to employers. The New Rule, however, returns to a more comprehensive analysis in which none of the seven factors are considered dispositive. Notably, the New Rule clarifies that a lack of permeance in the working relationship “does not necessarily mean that the worker is in business for themselves instead of being economically dependent on the employer for work.”
The DOL has further emphasized that the New Rule test is aimed to determine “whether the worker is either economically dependent on the potential employer for work or in business for themselves.” Such a determination is consistent with decades of case law analyzed under the FLSA.
Although the New Rule officially went into effect in March 2024, many courts it as overly pro-employee. As a result, court challenges have already surfaced. For instance, a group of freelance writers and editors brought a suit claiming that the New Rule makes it more difficult for employers to treat workers as independent contractors, thus causing freelancers and other independent contractors to lose business opportunities (Warren v. US Dep’t of Labor, N.D. Ga., No. 2:24-cv-00007). The lawsuit claims that “Stakeholders are effectively being told that anything about their business could be relevant, and the Department or a court are the only ones who can properly weigh the factors.”
Moreover, it appears that at least some federal courts will be uncooperative with applying the New Rule. The federal courts highlight that they have decades of experience applying the pre-2021 ERT and thus do not need agency guidance to tell them how to interpret the FLSA. As a result, it appears unlikely that the federal courts will apply much deference to the DOL’s new interpretation of what they consider an “old” law that they have been applying for decades.
Additionally, as mentioned earlier, the New Rule overrides a previously established Trump administration rule. In fact, the 2024 New Rule is the third version of the FLSA test since 2020. In short, the courts have been reluctant to modify their long-standing approach to employee vs. independent contractor disputes given that the DOL seems to issue new analyses as political winds shift.
It is also uncertain whether the DOL possesses the proper authority to issue the New Rule under the Federal Vacancies Reform Act and the Appointments Clause of the U.S. Constitution. Specifically, Acting Secretary of Labor Julie Su has not been confirmed by the Senate, thus creating substantial legal questions as to whether she may lawfully act in her capacity as Acting Secretary.
So, how should businesses precede? In short, businesses should proceed with caution. Businesses should be aware that the DOL is looking to target employers who misclassify workers as independent contractors. Specifically, the DOL is clearly targeting working relationships in which the worker is economically dependent on the employer but is nevertheless classified as an independent contractor. For more information about how the DOL may analyze a potential dispute, employers should read this article which outlines specific questions the DOL will consider in its analyses.
