The federal Department of Labor (DOL) recently issued a final rule defining independent contractors effective on March 11, 2024.  Distinguishing independent contractors from employees is significant, as independent contractors are not protected under the Fair Labor Standards Act (FLSA) and are ineligible for other benefits of employment.    

There are a number of “tests” that are applied in different contexts, such as the longstanding 20-factor test of the Internal Revenue Service (IRS) and several different tests under Massachusetts law, discussed in an earlier AIM HR Edge article here.  The Massachusetts three-factor “ABC test” is more stringent than the new DOL rule, so the new federal rule is likely to impact only those businesses with operations that engage independent contractors in other states. The DOL rule is primarily used to determine compliance with the FLSA. 

The DOL issued an interpretation in January of 2021 (the 2021 Rule) to better define independent contractors, as courts varied widely on their interpretation of the many factors that could be considered.  The 2021 Rule set out the following factors as dispositive: 

1. The nature and degree of the worker’s control of the work; and 

1. The worker’s opportunity to earn a profit or loss. 

If both factors pointed toward the same classification, then the worker would be classified as such.  For example, a worker who performed work free from the control of others, and who could make a profit from the work, would be classified as an independent contractor.   

If the two factors led the analysis to opposite conclusions, three other factors would be considered: the degree of skill required for the work, the permanence of the relationship between the worker and the company, and whether the work was part of an integrated unit of production. 

Following the change in presidential administration, the DOL delayed the effective date of the new rule and in October of 2022 issued a new Notice of Proposed Rulemaking (NPRM).  The NPRM proposed a multifactor test, generally thought to favor employee status.  The recently issued final rule adopts the NPRM with several exceptions. 

The New DOL Rule 

The new rule reverts to a multi-factor, “totality of the circumstances” analysis of the relationship, with no one factor being dispositive.  The following factors will all weigh into the decision: 

1. The worker’s opportunity for profit or loss depends on managerial skill. “This factor considers whether the worker has opportunities for profit or loss based on managerial skills (including initiative or business acumen or judgment) that affect the worker’s economic success or failure in performing the work.”  The worker does not have to have taken advantage of these opportunities, but their availability points toward independent contractor status. 

1. Investments made by the worker and the employer. A worker’s investment in tools and equipment may point toward independent contractor status.  

1. Degree of permanence of the relationship. A work arrangement that is indefinite in duration is more likely to be seen as an employment relationship.  However, the length of the relationship is less important than the understanding between the parties about the nature of the relationship, including both in the written agreement and in practice. The worker’s ability to set a timeline is evidence of the worker’s exercise of independent business initiative, supporting a classification of independent contractors. 

1. Nature and degree of the company’s control over the worker. Facts relevant to the control of the worker include whether the business sets the schedule for the worker, supervises the worker in the performance of the work, sets the cost of the work, and limits the worker from engaging with other businesses.  The greater the control the business has over the worker’s performance, the more likely the worker is to be classified as an employee. 

1. The extent to which the work performed is an integral part of the (alleged) employer’s business.  If the work is “critical, necessary, or central to the employer’s principal business,” it weighs in favor of employee status.  This departs from the 2021 Rule, which considers whether the work if part of “an integrated unit of production.” 

1. Whether the worker uses specialized skills to perform the work.  More specialized skills point toward independent contractor status.  It is not enough that a worker is highly skilled – the skills must be used in the performance of the work. 

It remains to be seen how this new test will be applied to the facts of individual work arrangements.  The new rule is expected to result in more workers falling into the employee category, but we will have to wait for legal challenges to learn how the rule is interpreted in court. 

Members with questions about the classification of independent contractors or any other human resources matter may reach out to the AIM HR Helpline at 800-470-6277.