Tuesday, January 9, 2024, the Department of Labor (DOL) released its Final Rule outlining whether an independent contractor can really be classified under federal law as such.  This presents employers (the buyers of IC services) that use independent contractors with a new and potentially costly concern. The DOL’s rule changes how an employer is allowed to classify those workers it engages as contractors rather than employees. The rule  will impact contractors engaged by a business to provide specialized services or production and could impact individuals offering their services all the way through Uber and Door Dash workers.

The new independent contractor rule modifies a test historically used by the courts called the “economic reality” test. This test was based upon a 1947 Supreme Court decision in United States v. Silk. That case looked at five factors:

1. The degree of control exercised by the employer over the worker
2. The worker’s opportunity for profit or loss and their investment in the business
3. The degree of skill and independent initiative required to perform the work
4. The permanence or duration of the working relationship
5. The extent to which the work is an integral part of the employer’s business.

From these criteria, the courts would look at “the totality of the circumstance” to find whether the relationship between the business and the independent contractor was one where the independent contractor was actually “in business for themselves”.

The new rule makes changes to these criteria. Principally, by adding another test criteria that significantly changes the analysis. Under the rule published January 9, 2024, the following criteria will be applied by the DOL:

1. The extent to which the work performed is an integral part of the employer’s business
2. Whether the worker’s managerial skills affect his or her opportunity for profit and loss
3. The relative investments in facilities and equipment by the worker and the employer
4. The worker’s skill and initiative
5. The permanency of the worker’s relationship with the employer
6. The nature and degree of control by the employer

This last criteria is the one where the DOL attempts to close the door on a lot of independent contractor relationships. Whereas before, questions of control looked at whether the business set the worker’s hours, supervised the performance of the work, disciplined the worker, limited who the worker can work with, used any technological means of supervision, and controlled the worker’s prices or rates for services – all in the realm of direct control. The new rule adds a level of indirect control to the consideration of independent contractor status.

What does this mean? The DOL states that this could include “control implemented for the purposes of complying with legal obligations, safety standards, or contractual or customer service standards. This criterion also calls for consideration of the “extent to which the work performed is an integral part of the employer’s business” and “whether the worker uses specialized skill to perform the work and whether those skills contribute to the business-like initiative.”

These rules along with the National Labor Relations Board (NLRB) joint employer rules significantly constrict small business development by limiting those individuals’ and business entities’ independence. Workers that go into business for themselves will be hamstrung doing so because the buyer of their services will be unable to do business with that entity due to potential legal issues surrounding employee/IC classification.  

These new regulations will have Courts ultimately deciding how to use these criteria and will have to determine how much deference to give the DOL’s rulemaking authority. States are also taking up how they will now define independent contractor. California passed its AB 5 law several years ago and then had to significantly modify it as a result of the negative impact it had on many of its businesses. Last year in Michigan proposed legislation changing our state’s definitions of contractor were beaten back by pro-business organizations such as the Small Business Association of Michigan.

Absent the unlikely undoing by Congress or a stay by a Court like we saw by a Texas court in 2016, this rule will go into effect in 60 days.

Sources:

DOL’s New Independent Contractor Rule: A Return to 2020 Allen Bloom (10/31/2023)

White House Clears Independent Contractor Final Rule Allen Bloom (1/8/2024)

Law 360 Breaking: DOL Unveils Final Independent Contractor Rule (1/9/2024)