Earlier this year, the U.S. Department of Labor published a final rule that sheds new light on how it will decide whether workers are employees or independent contractors.  The rule, which replaces a rule issued in 2021, guides how the agency will administer and enforce the Fair Labor Standards Act (FLSA).

The 2021 rule had emphasized two factors to determine whether a worker is an employee or independent contractor – (1) control and (2) the opportunity for profit or loss.  It also considered a worker’s investments and initiative, not as its own factor, but as part of the “opportunity for profit or loss” factor.  And it did not consider whether the worker’s work is central or important to the potential employer’s business.

These factors (and others), according to the current USDOL, did not account for all of the factors that determine whether a worker is economically dependent on an employer for work – what they call the “economic reality” test.  And, ultimately, according to the current DOL, whether a worker economically depends on a potential employer determines whether that worker is an employee or independent contractor.  This is why the DOL issued a new rule.

So, what’s new?  The 2023 rule, first and foremost, does not emphasize any individual factor as determinative in deciding whether someone is an employee or independent contractor. Instead, the USDOL will use six factors to classify workers, and it will use a “totality of the circumstances” approach. The six factors are:

1. Opportunity for profit or loss depending on managerial skill
   • USDOL will consider whether the worker can negotiate pay for services provided, whether the worker can choose jobs and choose the order or time to perform them, whether the worker markets or advertises to bring in work, and whether the worker hires others, purchases materials and equipment, or rents space.
2. Investments by the worker and the potential employer
   • USDOL will consider whether the worker makes capital or entrepreneurial investments, such as increasing the ability to do different or more work, reduce costs, or increase market reach.
3. Degree of permanence of the work relationship
   • USDOL will consider whether the work is indefinite, continuous, or exclusive of other work.
4. Nature and degree of control (even indirect control or reserved control not actually exerted), including the following subfactors:
   • Scheduling
   • Supervision
   • Price-setting
   • Ability to work for others
5. Extent to which work performed is an integral part of the potential employer’s business
   • USDOL will consider whether the work performed is critical, necessary, or central to the potential employer’s principal business.
6. Skill and initiative
   • USDOL will consider whether the worker uses specialized skills or depends on training from the potential employer.
7. (Plus) Additional factors that may be relevant in a particular case.

Of course, USDOL’s commitment to a totality of the circumstances analysis, and to not assign weight to any particular factor, isn’t the whole story.  USDOL indicates that some factors will be more or less important than others in different cases – depending on the factors of each individual case.  That’s right – it’s time to bring your crystal ball out of storage.

The bottom line is that the 2023 rule is designed to “reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.”

Unfortunately for businesses, the 2023 rule will leave many guessing which factors will be given greater weight than others under the “totality of the circumstances” of a particular case.  And this will increase the risk for businesses that choose to roll the dice by classifying a worker as an independent contractor, where the FLSA can impose stiff penalties for employees not paid consistent with that law.

Given this landscape, it is more important than ever for businesses to consult with legal counsel in close cases to explore all available options and mitigate risk.  In the meantime, expect legal challenges to the 2023 rule from interested business groups.  The longevity of the rule will depend on how those play out – and the results of the next presidential election.  Did I mention that you should get your crystal ball?

Questions?

Contact the author Adam Walker.