DOL Issues New Independent Contractor Rule

The Department of Labor (DOL) released its new, much anticipated independent contractor rule (IC rule) on January 9, 2024. The final rule changes DOL’s legal assessment criteria for whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). Under the FLSA, employees are entitled to minimum wage, overtime pay, and other benefits. Independent contractors are not legally guaranteed these benefits, but they generally have more flexibility to set their own schedules and work for multiple companies.

The IC rule addresses six factors that guide the analysis of a worker’s relationship with an employer, including

1. any opportunity for profit or loss a worker might have;
2. the financial stake and nature of any resources a worker has invested in the work;
3. the degree of permanence of the work relationship;
4. the degree of control an employer has over the person’s work;
5. 5whether the work the person does is essential to the employer’s business; and
6. a factor regarding the worker’s skill and initiative.

Some of the above mentioned factors are known as the “economic realities” test, which include

1. The degree of the worker’s control over the work and
2. The worker’s opportunity for profit or loss.

The final rule rescinds a 2021 Trump-era rule in which two core factors—control over the work and opportunity for profit or loss—carried greater weight in determining the status of independent contractors. 

Largely mirroring the IC rule instituted during the Obama Administration (with a few minor tweaks), under the new rule, employers would use a totality-of-the-circumstances assessment for worker classification analysis in which none of the factors carry greater weight. “No factor or set of factors has a predetermined weight, and a totality of the circumstances of the working relationship must be considered,” Jessica Looman, administrator of the DOL’s Wage and Hour Division, said in a Jan. 8 press briefing. “The six factors are not exhaustive, nor are any of them more important than any others.”

The final rule differs from the proposed rule in that it includes a couple of clarifications regarding how the six “economic realities” factors applied when determining a worker’s classification. Specifically, the DOL said actions taken by an employer solely to comply with local, state, or federal law do not count toward the company control or investment factors to indicate a worker should be deemed an employee. Also, costs imposed on a worker unilaterally by an employer do not count as worker investments that would indicate they’re an independent contractor.

In public comments filed with DOL on the proposed rule, the 4As urged the DOL to protect the flexibility and utilitarianism of the freelance business model by ensuring business owners, particularly those that employ skilled, creative contractors, are not harmed in the process of any final rule’s implementation. 4As written comments supplemented other general written comments filed as part of a coalition with the U.S. Chamber of Commerce and over two hundred businesses and state and local chambers of commerce.

In the agency ecosystem, independent contractors have always played an important function in executing client campaigns. But with some of the shift from agency of record (AOR) work to more project-based work, independent contractors will play an outsized role in the future, as agencies will need to scale their workforces quickly in response to project lifecycles. This final IC rule will make it harder for businesses of all types, including agencies, to classify their workers as independent contractors under federal wage and hour laws and increases the risk that some of their workers may be misclassified. 

Agencies who want to ensure their freelancers stay classified as independent contractors may consider changing their policies or practices to improve their chances of satisfying the new test for independent contractors. Agencies who are concerned about high misclassification risk due to adjusted factors in the new rule may consider transitioning former IC workers to employee status (such as to a part time W-2, non-benefit employee). Agencies that reserve the right to control certain aspects of the work done by freelancers— even if they don’t actually exercise that control — could be found to have an employee relationship with the freelancer. 

The DOL intends to release more guidance to help employers comply with the final IC rule.  In its public comments, the 4As asked DOL to specifically solicit complex hypotheticals and examples (including those which have scenarios with ICs from the skilled creative industry) from business stakeholders to add to any guidance materials.  

The rule was published in the Federal Register on January 10, 2024 and will go into effect on March 11, 2024. 

Have questions about the new independent contractor rule? Please contact Amanda Anderson, 4As VP Government Relations & Sustainability.