On January 10, 2024, the U.S. Department of Labor released its final rule on employee or independent contractor classification under the Fair Labor Standards Act (FLSA). Effective March 11, 2024, the rule implements a six-factor test aligning with judicial precedent, returning to a totality-of-the-circumstances analysis of “economic realities” for worker status determination.
The final rule also rescinds the 2021 Independent Contractor Rule deemed inconsistent with the law and longstanding judicial precedent.
The six factors in the final rule include opportunity for profit or loss, investments by the worker and potential employer, degree of permanence, nature and degree of control, work’s integration with the employer’s business, and skill and initiative. The final rule emphasizes these factors aren’t exhaustive, and no single one is decisive. It removes the prior prohibition on considering work centrality to the employer’s business.
Like the 2021 rule, it emphasizes that independent contractors are in business for themselves, unlike FLSA-covered employees economically dependent on the employer.
So, what does this mean for U.S. workers? Let’s discuss the details in this article.
The Difference From the 2021 Rule
While the final rule aligns with the proposed rule, it diverges in interpreting the newly established test. Notably, it refines the “investments by the worker and the employer” factor, emphasizing a comparison of relative investments to support independent contractor status.
Additionally, the final rule provides clarity on control indicative of employee status under the FLSA. It specifies that actions for legal compliance alone do not signify control for independent contractor classification. Yet, measures for safety, quality control or exceeding legal standards may suggest control under the final rule.
The final rule modifies the DOL’s stance on specific worker investments. It clarifies that certain costs borne by workers, like tools and imposed labor costs, don’t signify entrepreneurial investment and suggest employee status. Conversely, capital or entrepreneurial investments supporting an independent business indicate independent contractor status.
The final rule’s practical outcome may lead more workers, even those desiring independent contractor status, to be classified as employees under the FLSA. The expanded factors and absence of a controlling factor may heighten ambiguity, variability and potential litigation in status determinations, granting increased enforcement discretion to the DOL. Employers must grasp the implications of the final rule, considering that workers cannot voluntarily choose or self-designate their status under the FLSA.
What Are Other Considerations?
The final rule specifically addresses the classification of employees versus independent contractors under the FLSA. Other distinct and usually more limited criteria are employed for determining employee status under various laws, such as the Internal Revenue Code, National Labor Relations Act, Title VII and common law.
Designated as an “interpretive” rule, it signifies the DOL’s perspective on the law, lacking binding regulatory force that courts must adhere to. Moreover, the final rule does not directly impact independent contractor classification for state employment laws, such as those implementing a California-style “ABC” test.
The legal dispute regarding the DOL’s 2021 attempt to delay and retract the 2021 Independent Contractor Rule is unresolved. The U.S. Court of Appeals for the Fifth Circuit temporarily halted the case awaiting the DOL’s final rule. Industry groups are expressing intent to pursue or initiate legal actions against the final rule.
Despite the persistent legal uncertainties, organizations should meticulously assess their classification policies and practices in consideration of the final rule, which may serve as the primary standard for DOL enforcement.
Impact on Businesses
The rule, effective March 11, 2024, doesn’t use an “ABC” test and doesn’t impact state laws that use it. It revises DOL guidance for FLSA classification. While intended for clarity, it may lead to increased litigation, especially in transportation and logistics, as workers seek reclassification.
The rule fails to address scenarios where workers, desiring independent contractor status, willingly choose to be “economically dependent” on one company, creating uncertainty for businesses utilizing legitimate independent contractor relationships.
Additionally, the rule favors employee status if the work is crucial to the employer, but businesses naturally pay for necessary services. Actions ensuring compliance, safety and quality control may suggest control over workers, contrary to past court decisions. The rule gives greater importance to reserving control, even without exercising it, prompting businesses to reassess contractor agreements.
Uber and Lyft Speaks Out, Not Affected
Uber (NYSE:UBER), Lyft (NASDAQ:LYFT) and DoorDash (NASDAQ:DASH) were optimistic that the rule wouldn’t mandate gig driver reclassification. However, business groups cautioned about uncertainty, and the Labor Department’s enforcement approach will be crucial.
The new rule, proposed 15 months ago, replaces a Trump-era standard, impacting employee classification criteria. Contractors lack assured minimum wages and benefits.
Labor advocates endorsed the rule, contending lax regulations allowed employers to misclassify workers, evading fair compensation. The Economic Policy Institute highlighted common misclassified workers, estimating losses of $10,177 to $16,729 annually for construction workers.
Mary Kay Henry, president of the Service Employees International Union representing about two million workers, stated the new rule targets practices of companies like Uber and Lyft exploiting worker misclassification. Employers decide how to weigh criteria like control, skills, relationship permanence and worker investment.
Uber and Lyft claim the rule won’t materially impact their operations or force a change in their business models but acknowledge increased complexities and ambiguities.
Flex Association, representing major app platforms, seeks to protect workers relying on app-based income. With more states enacting pro-worker laws, such as New York, the U.S. Chamber of Commerce considers legal challenges due to the rule’s ambiguous criteria, causing uncertainty for employers.
U.S. House Votes to Revoke Labor Rule
On Friday, the GOP-led U.S. House of Representatives voted 206 to 177 to repeal a forthcoming federal labor board rule. The rule, opposed by business groups, aimed to consider companies as employers of contract and franchise workers, compelling union negotiations. The proposal heads to the Senate, where a slim Democratic majority exists, but Senator Joe Manchin, a Democrat from West Virginia, opposes the rule.
Introduced under the Congressional Review Act, the resolution passed in the GOP-led U.S. House of Representatives, allowing Congress to repeal agency rules through a majority vote. President Joe Biden indicated a veto, requiring a two-thirds majority to override. The rule aimed to treat companies as “joint employers” of contract and franchise workers based on control over key working conditions.
Companies labeled joint employers were obligated to negotiate with unions representing contract and franchise workers, facing potential liability for violating federal labor law. Representative Virginia Foxx criticized the NLRB policy as “anti-freedom” and warned of increased government regulation and union influence on small businesses.
Democratic Representative Eric Sorensen argued against Republican claims, stating the rule’s essence was whether an employer must engage in bargaining. The U.S. Chamber of Commerce and business groups filed a lawsuit challenging the rule’s definition of an independent contractor, alleging violations of labor law and potential industry disruptions.
What Now?
In 2023, Labor and Employment law underwent dynamic shifts, setting the stage for potential transformation or stagnation in 2024. Proposed regulations might evolve into final rules, reshaping employment law. The impact may vary, influenced by an election year’s priorities, urging employers to stay vigilant.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
