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Posted on January 23, 2024
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:
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:
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.