Employee or Independent Contractor? Department of Labor Issues Final Ruling

January 22, 2024

On January 10, 2024, the U.S. Department of Labor (DOL) published its final ruling on a hotly debated employment law question ¬– what is the standard for determining if a worker is an employee or an independent contractor?

In conjunction with the implementation of the Final Rule (effective 3/11/24), the Federal DOL rescinded the 2021 Independent Contractor Rule. Prior to this update, employers made determinations on the classification of workers using the 2021 Independent Contractor Rule. In announcing this update, the DOL cited three (3) elements within the 2021 Rule that the agency determined necessitated a change.

From the recent DOL press release rescinding the 2021 Federal Rule:

The Department believes that the 2021 Independent Contractor Rule does not fully comport with the text and purpose of the FLSA as interpreted by courts. Specifically, the 2021 Independent Contractor Rule includes provisions that are in tension with longstanding case law and the Department’s prior guidance on independent contractor status, such as:

•    its designation of two (2) “core factors”— 1. control and 2. opportunity for profit or loss—which are given a greater predetermined weight in the analysis;
•    its consideration of a worker’s investments and initiative only as part of the opportunity for profit or loss factor; and
•    its prohibition against considering whether the work performed is central or important to the potential employer’s business.

The updated Federal Contractor Rule restores the multifactor analysis that had long-been the measuring stick courts used. In its release, the agency said the hope is that this shift will ensure all relevant factors are analyzed to determine whether a worker is an employee or an independent contractor.

The updated rule identifies six (6) factors that must be analyzed when determining the proper classification of a worker:

1) opportunity for profit or loss depending on managerial skill;
2) investments by the worker and the potential employer;
3) degree of permanence of the work relationship;
4) nature and degree of control;
5) extent to which the work performed is an integral part of the potential employer’s business; and
6) skill and initiative.

Within the final ruling, found here, the Federal DOL offers detailed guidance on how to apply these factors as part of the process to determine proper worker classification. The agency also points out that the six (6) factors are not all-inclusive:

Additional factors may be relevant if such factors in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work (i.e., an employee under the FLSA).

This is a significant ruling for employers to be aware of, as employers found to have misclassified workers face steep fines and penalties. We work closely with employers to ensure they are in the best position to be fully compliant with the law.  

The final rule will take effect March 11, 2024. In addition to this Final Rule issued by the Federal DOL employers in New York State are also subject to rules and regulations issued by the State Department of Labor and may also be subject to additional rules issued by the municipalities in which they work.

If you are an employer utilizes independent contractors please call myself, or any member of our labor and employment team. We are here to collaborate with employers proactively to assist with compliance in the ever-changing labyrinth of federal, state and local laws, rules and regulations affecting your business.

Chanel T. McCarthy is a partner of Gross Shuman, P.C. and has over a decade of experience assisting clients with their business needs - from lease agreements and contract negotiations to operations and employment matters. Chanel has a wide range of experience in business law including the distinct issues relative to small business, construction and hospitality. Chanel also brings a wealth of experience in the areas of trust and estate administration and litigation, and other matters before the Surrogate’s Court. She can be reached at 716-854-4300 ext. 254 or cmccarthy@gross-shuman.com.