DOL Finalizes Rules for Independent Contractor Classification

Washington, DC (WorkersCompensation.com) – On Jan. 8, the U.S. Department of Labor finalized its new rule on independent contractor classification, rolling back the previous changes made by the Trump administration.

The final rule, published to the Federal Register on Jan. 10, restores previous standards requiring companies to weight a variety of factors when classifying workers. Advocates say the new rule ensures workers get the benefits – like workers’ compensation, wage and hour standards, and unemployment insurance – they are entitled to. Opponents say it will make businesses less likely to hire contract workers and freelancers.

The DOL’s new rule for worker classification includes six tests – the degree to which the employer controls how the work is done, the worker’s opportunity for profit or loss, the amount of skill and initiative required for the work done, the permanence of the working relationship, how much of an investment the worker makes in equipment and materials required for the work, and how much the work performed is integral to the employer’s business.

Under the Fair Labor Standards Act, employees are entitled to minimum wage, overtime pay and other benefits. Employers pay workers’ compensation and unemployment insurance for each employee, and take taxes and other deductions out of employees’ paychecks.  Independent contractors, however, are not entitled to benefits. But contractors have more flexibility when it comes to setting their own schedule and working for more than one company. Contractors pay their own taxes and social security payments, and carry their own insurance coverage.

The new rule replaces a final rule put in place during the waning days of the Trump administration in January 2021. That rule primarily considered two factors when determining a worker’s classification – the nature and degree of control over the work, and the worker’s opportunity for profit or loss.

The new rule turns back the clock in some respects, attorney Allan Bloom with Proskauer in New York City said on his blog, Law and the Workplace.

“The new rule returns the inquiry to its historical roots, both at the DOL and in many courts, considering six overarching factors in a “totality of the circumstances” analysis to determine whether, as a matter of economic reality, the workers are either dependent on the potential employer for work or in business for themselves,” he wrote.

It shouldn’t be a hardship for businesses to comply with the standard that existed prior to 2021, he said.

“It should not be a strange test to employers,” he said. “We’re back to where we were in the past. At the end of the day, it’s the courts that really have the power to make that determination (in regard to classification).”

The new rule is opposed by the U.S. Chamber of Commerce.

“The Department of Labor’s new regulation redefining when someone is an employee or an independent contractor is clearly biased towards declaring most independent contractors as employees, a move that will decrease flexibility and opportunity and result in lost earning opportunities for millions of Americans,” Marc Freedman, the U.S. Chamber of Commerce’s Vice President of Workplace Policy said in a statement. “It threatens the flexibility of individuals to work when and how they want and could have significant negative impacts on our economy.”

The National Retail Federation (NRF), which opposed the rule when it was proposed in 2022, said the new rule would hurt workers as well.

“Retailers, along with countless other employers, maintain a wide range of business relationships with independent contractors, including billing, facility maintenance, data analysis, delivery, marketing and other critical services,” NRF’s Senior Vice President of Government Relations David French said in a press release. “As bad as this rule is for retailers specifically and employers generally, it is far worse for the millions of workers nationwide who cherish the opportunity to engage in independent work.”

Proskauer’s Bloom said he expects legal challenges to the new rule, but reminded businesses that state laws are still applicable.

“Businesses that remain confident in their independent contractor classifications under the new federal rule must still contend with the laws in certain states that apply a more stringent or otherwise different test for worker classification, including (among others) California, Massachusetts, and New Jersey,” he wrote. “If a worker is deemed an employee for wage and hour purposes under those state laws… then federal law will not limit the potential exposure.”

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