DOL Announces New Federal Rule to Determine Independent Contractor Status

By XobeeAdmin on January 9, 2024 in Legal Update

On January 9, 2024, the federal Department of Labor (DOL) announced the issuance of a final rule for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA).  The new rule is a culmination of a months-long process, which began with the announcement of the proposed rule in October 2022, followed by a lengthy notice-and-comment period, series of listening sessions conducted by the DOL, and receipt of more than 55,000 public comments.  The new rule itself is the Biden Administration’s response to a 2021 rule issued in the final days of the Trump presidency, which was more favorable to employers than the new rule.

With the new rule, the DOL is adopting the multi-factor “economic reality” test that federal courts have used for many years to determine whether a worker is an employee or independent contractor.  This test relies on the totality of the circumstances where no one factor is determinative.  According to the DOL, the ultimate inquiry is whether, as a matter of “economic reality,” the worker is economically dependent on the employer for work (and is thus an employee) or is in business for themself (and is thus an independent contractor).

For the final rule, the DOL has identified the following six factors necessary to determine employee/independent contractor status:

  1. Opportunity for profit or loss depending on managerial skill;
  2. Investments by the worker and the potential employer;
  3. Degree of permanence of the work relationship;
  4. Nature and degree of control;
  5. Extent to which the work performed is an integral part of the potential employer’s business; an; and
  6. Specialized skill and business initiative.

According to the DOL, no factor has more “weight” than the others and each needs to be considered in any given situation.  This is a significant change from the 2021 rule, which also considered various factors but held that control, as well as profit/loss opportunity, were the “core,” or most important, factors.  In addition to the six factors identified above, the new rule also makes clear that “additional factors” may be relevant.

Employers should be mindful that they must comply with applicable federal and state law.

For California employers, the effects of the new rule should be minimal.  This is because in most circumstances, California courts will employ the more stringent ABC Test to determine whether a worker is an employee or independent contractor.

For Nevada employers, the situation is more complicated.  For state wage claims (with the exception of the minimum wage regime set forth in the Nevada Constitution), Nevada applies the “conclusive presumption” test, which is more favorable to employers.  However, in order for this test to apply, the working relationship must minimally be governed by a contract, among other factors.  In the absence of a contract, Nevada wage claims are analyzed under an “economic realities” test, as articulated by the Nevada Supreme Court in Terry v. Sapphire Gentlemen’s Club, which is actually very similar to the new DOL rule.  Most importantly, Nevada employers who use independent contractors must be aware that just because they can pass the “conclusive presumption” test under Nevada state law, they still must meet the new federal DOL rule requirements, which are more difficult.  There may be situations where a worker would be classified as an independent contractor under Nevada law but an employee under federal law.

With the new rule becoming effective on March 11, 2024, now is a good time for Nevada and California companies who utilize independent contractors to review the details of these positions with qualified legal counsel to ensure compliance.  With two rule changes in the past three years, employee/independent classification continues to be a prominent topic in employment law.  While it is likely there will be court challenges to the new rule, until there is a definitive rejection or changing of the rule, we recommend compliance with the DOL’s new requirements.  For more details about the new rule, the DOL has published a Frequently Asked Questions page.