DOL Finalizes New Independent Contractor Rule: But, Really, it’s Just the Same Old Smell Test
The Department of Labor (“DOL”) has issued its long awaited independent contractor rule in final form. See 89 F.R. 1638 (Jan. 10, 2024). This rule is intended to guide the determination of whether a given worker is an independent contractor or, on the other hand, the person is an employee entitled to the minimum wage and overtime protections of the Fair Labor Standards Act (“FLSA”)—protections not afforded to independent contractors.
The new rule, according to DOL, restores long-standing principles that govern the determination of independent contractor versus employee status. That’s correct. This is nothing new. Under this analysis, the critical issue is whether workers “as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves.” Id. at 1638. DOL’s new regulations state that “multiple factors assessing the economic realities of the working relationship are used” to make a determination based on the “totality-of-the-circumstances” in which the “the outcome of the analysis does not depend on isolated factors but rather upon the circumstances of the whole activity to answer the question of whether the worker is economically dependent on the potential employer for work or is in business for themself.” Id. at 1742 (setting forth text of new 29 C.F.R. 795.110(a)).
The discernment of those realities will focus on six time-worn factors, which are:
(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; and
(6) skill and initiative.
Id. at 1742-43 (to be codified at 29 C.F.R. 795.110(b)).
Honestly, the only “new” thing here is that this officially puts the kibosh on the Trump Administration’s spin on the independent contractor analysis.
The Trump Administration ostensibly wanted to make the analysis more predictable; however, the rule did so by placing a thumb on the scale by focusing on two “core factors,” namely—opportunity for profit or loss and the degree of control. If these factors, by themselves, weighed in favor of either status, then the rule generally presumed the outcome on those factors alone. Although other factors (e.g., the person’s degree of investment, the permanence of the relationship, or whether the individual’s work was part of an integrated unit of production) would be considered, they were “highly unlikely” to lead to a different end result.
Before the Trump regulations, the determination of whether a given individual was or was not an employee or independent contractor depended on a hodgepodge of court cases and DOL guidance documents (such as Wage and Hour Opinion Letters or Administrator Interpretations). The outcomes have always been highly dependent on the facts of individual cases, particularly because the cases and guidance uniformly stated that no one factor was dispositive. And that’s the place we’ve come back to.
Thus, the Trump analysis is now officially over effective March 11, 2024 when DOL will then officially base its evaluation of worker status on the new formulation. If you want some marginally useful hints about potential outcomes, you should look at the preamble statements published in the Federal Register. Here’s a summary of the examples for each factor:
Opportunity for profit or loss based on managerial skill: here DOL offers up two scenarios in landscaping. Id. at 1676. If an individual is able to make money only if a landscaping company provides them assignments to work for the company’s clients, the worker is probably an employee since his or her income increases or decreases based on their taking an assignment. However, if the same worker offers their services to clients directly, decides which jobs to take, and engages helpers, then that person likely is an independent contractor.
Investments by the worker and the potential employer: DOL focuses here on a graphic designer. Id. at 1685. If he or she goes into a design firm, uses its equipment, and does that company’s work for its clients, then the worker is likely an employee even if they use some of their own equipment. The same individual, however, may be an independent contractor if they use their own equipment, rents their own space, and markets their services to a number of firms.
Permanence of the work relationship: This factor is illustrated with a food service scenario in which an individual provides food services at an entertainment venue. Id. at 1690. If the individual provides those services at a single venue on a continuous basis over an extended period of time, they fall on the employee side. If, however, they furnish services to more than one venue and pick and choose which events they’ll support, then they would tend to the independent contractor end of the spectrum.
Nature and degree of control: Nurses are the subject of these examples. Id. at 1706-07. In one scenario, a nurse is engaged by a nursing home to provide generalized nursing services to its residents under a fixed schedule with fairly specific rules even though they work with little supervision. This scenario favors employee status when compared with a situation in which a nurse provides specific services for which he or she is uniquely qualified to provide to residents at the same facility by arrangement with the individual patient, with no facility direction or schedules, particularly where the nurse also provides these services at various other nursing homes. This latter circumstance leans toward independent contractor status.
Extent to which the work performed is an integral part of the potential employer’s business: I have to say that this particular example is so obvious as to be almost useless. If a tomato farm engages individuals to pick tomatoes, their services are integral to the tomato farm. However, the accountant who prepares the farm’s tax return is not doing the work of growing and picking tomatoes. Guess which one is the employee? Hint, it’s not the accountant. Id. at 1711.
Skills and initiative: This last factor is illustrated by a skilled welder. Id. at 1715. If he or she does welding using their unique abilities for a single construction firm but does not figure out the sequence of work, order materials, or use their skills to get more work elsewhere, that person may be an employee. However, that same worker may be an independent contractor if he or she holds themselves out as a skilled specialty welder who provides unique services to a variety of firms in which their amount of work rises and falls based on their level of business initiative.
Sadly, these are just relatively obvious, isolated scenarios under individual factors. The examples offer little guidance to address nuances particularly when some factors favor one outcome while others tip the scales in the opposite direction.
At the end of the day, it appears that the Trump framework was little more than a commercial break in an otherwise long show. Yet, we’re seeing a cacophony of proclamations about how this final rule will tip the scales, particularly in the gig worker industry. I don’t think so.
To assess independent contractor status, one has to dig into the contracts, examine the manner of doing work, consider whether particular rules merely require compliance with legal duties, and account for the fact that an individual may work for multiple firms at once, etc., etc. While DOL will use this test for its own enforcement efforts, this will play out differently under state laws (yes, that means California). And courts are by no means bound by what DOL says—they’ll likely focus mainly on the state of the law in their jurisdiction.
So, as the title of this blog suggests, this ostensibly “new” rule actually is something employers have lived with for decades. And while there may be a bunch of factors dressed up with lots of words, this is all just a fancy smell test. And that’s in the nose of the beholder.