In January 2024, the Department of Labor (DOL) announced its final rule for determining whether a worker is an employee or an independent contractor.
Is the rule final, though? We will see.
In the past few years, we have careened wildly from a set of well-established common law factors for determining independent contractor status, to an attempt by the Trump administration to allow employers to classify more workers as independent contractors, to an attempt by the Biden administration to repeal the Trump-era changes and return us to something resembling the federal case law before 2021.
Unless the courts overturn the new final rule – or until a new administration takes over and attempts to change the rule again – we have a new 2024, final, independent contractor rule.
Below, we will review the recent history of the DOL’s Independent Contractor Rule and the factors that must be considered under the new, 2024, Biden Rule.
Independent Contractor Rule Whiplash
If you’ve been following the development of the independent contractor rule over the past few years, you may have developed whiplash from the fast and furious changes…
Democratic administrations want to make it more difficult for employers to classify workers as independent contractors, and they claim that employers are misclassifying employees as independent contractors to avoid their obligations under the FLSA (Fair Labor Standards Act) like overtime pay and other mandatory employee benefits.
Republican administrations want to make it easier for employers to classify workers as independent contractors, because why is the government interfering with the rights of both employers and workers to freely enter contracts and decide the terms of their work relationships?
The Independent Contractor Rule Before 2021
Before 2021, the factors to decide whether a worker is an employee or an independent contractor were found in case law only. There was no formal rule, and the courts used what is called the “economic realities test.”
For example, in Faludi v. U.S. Shale Solutions, LLC, No. 17-20808 (5th Cir. 2020), the Fifth Circuit identified five factors to determine that the plaintiff was an independent contractor (and therefore not entitled to unpaid overtime wages):
- The degree of control exercised by the alleged employer,
- The extent of the relative investments of the work and the alleged employer,
- The degree to which the worker’s opportunity for profit or loss is determined by the alleged employer,
- The skill and initiative required in performing the job, and
- The permanency of the relationship.
Although the DOL had previously issued guidance as to the classification of workers, there was no formal rule on the subject, and the DOL relied on the factors of the economic realities test as defined by the federal courts.
The 2021 Independent Contractor Rule/ The Trump Rule
The “Trump Rule,” or the 2021 Independent Contractor Rule, was the DOL’s first attempt to enshrine the factors for determining independent contractor status into a formal rule, and it was a significant departure from the economic realities test used by the federal courts.
In the 2021 Rule, two “core factors” were to take precedence over the remaining factors:
- The nature and degree of the worker’s control over the relevant work, and
- The individual’s opportunity for profit or loss.
Although there were additional factors, the Rule said that the additional factors should be given minimal weight, and the “core factors” would always outweigh the additional factors.
This was widely seen as a business-friendly model that, according to democratic lawmakers, would result in misclassification of workers so that employers could avoid their obligations under the FLSA.
Biden Repeals the Trump Rule
The “Trump Rule,” however, was to take effect as Biden was entering office, and the Biden administration quickly moved to withdraw the Trump Rule, returning the state of affairs to the pre-Trump economic realities test factors.
The Federal District Court Vacates the Biden Repeal of the Trump Rule
In 2022, however, the U.S. District Court for the Eastern District of Texas vacated the Biden administration’s repeal of the 2021 Rule, reinstating the 2021 Rule and allowing it to go into effect.
Biden Proposes a New Independent Contractor Rule
After the federal court vacated the Biden administration’s attempted repeal of the Trump Rule, the Biden DOL abandoned their attempt to withdraw the Trump Rule, and, instead, proposed a new rule to repeal and replace the Trump-era regulation.
The 2024 Independent Contractor Rule/ The Biden Rule
If the new Independent Contractor Rule is not blocked by the courts (it will likely be challenged in court), it will go into effect on March 11, 2024.
The 2024 Rule, or the Biden Rule, outlines six factors that should be considered when determining whether a worker is an employee or an independent contractor:
- Opportunity for profit or loss depending on managerial skill,
- The worker’s and employer’s relative investments,
- The degree of permanence of the work relationship,
- The nature and degree of control over the performance of the work and the work relationship,
- The extent to which the work is an integral part of the employer’s business, and
- The skill and initiative of the worker.
What should your business do in response to the 2024 Rule?
Employers should consider:
- Some workers may be classified as employees even when the employer and worker have agreed that they are an independent contractor,
- Changes may need to be made to independent contractor agreements and company policies to ensure that the company’s independent contractors are in fact classified as independent contractors under the 2024 Rule, and
- Changes may need to be made to ensure that the company is complying with the FLSA regarding mandatory benefits like overtime pay.
Below is a chart that may help to visualize the back-and-forth of the Democratic and Republican administrations in their fight over the Independent Contractor Rule, illustrating both 1) how the factors have changed over the past few years, and 2) the emphasis that is placed on certain factors under the 2021 Rule:
The Pre-Trump Factors | The Trump Rule/ 2021 Factors | The Biden Rule/ 2024 Factors |
The degree of control exercised by the employer. | The nature and degree of control over the relevant work. | Opportunity for profit or loss depending on managerial skill. |
The extent of the relative investments of the worker and employer. | An individual’s opportunity for profit and loss. | The worker’s and employer’s relative investments. |
The permanency of the relationship. | The degree of permanence of the work relationship. | The degree of permanence of the work relationship. |
The degree to which the worker’s opportunity for profit or loss is determined by the employer. | The skill required for the job. | Nature and degree of control over the performance of the work and the work relationship. |
Whether the work is part of an integrated unit of production. | The extent to which the work is an integral part of the employer’s business. | |
The skill and initiative required to perform the job. | N/A | The skill and initiative of the worker. |
Please feel free to contact one of our Murray Lobb attorneys to obtain our advice regarding employment law matters including the classification of independent contractors and employees. We also remain available to help you with all your general corporate, construction law, business, and estate planning needs.