Independent contractor rule released

On January 9, 2024, the U.S. Department of Labor released the final rule about how employers are to classify workers as employees or independent contractors.

The rule will be posted in the Federal Register on January 10, and is scheduled to take effect on March 11, 2024. It rescinds the 2021 independent contractor rule and replaces it with an analysis for determining employee or independent contractor status.

Specifically, the final rule does the following:

• Uses a multifactor, totality-of-the-circumstances analysis to assess whether a worker is an employee or an independent contractor under the FLSA.
• Allows all factors to be weighed equally; no predetermined weight is assigned to a particular factor or set of factors.
• Uses the longstanding interpretation of the economic reality factors. These factors include the:
  • Opportunity for profit or loss depending on managerial skill,
  • Investments by the worker and the potential employer,
  • Degree of permanence of the work relationship,
  • Nature and degree of control,
  • Extent to which the work performed is an integral part of the potential employer’s business, and
  • Worker’s skill and initiative.

Worker misclassification

Misclassifying employees as independent contractors may deny workers minimum wage, overtime pay, and other protections. This final rule aims to reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.

A trucking perspective

Although this final rule impacts a multitude of employers, the transportation industry in particular has a high level of interest in this change.

For example, Real Women in Trucking stated in the 339-page final rule that truck drivers who wholly own or independently finance a truck are true owner-operators because “[t]his type of investment gives [them] the ability to keep their truck if they decide to stop working for any particular company, and accordingly some measure of economic independence.” The commenter further stated that, in contrast, “employer-sponsored leases for work equipment, including for trucks, are not investments of the kind that weigh in favor of independent contractor classification.” The DOL responded that it generally agrees with this distinction, although it is hesitant to state that the existence of an employer-sponsored lease can never indicate independent contractor status.

Although the driver who wholly owns or is independently financing a single truck is making a quantitatively smaller investment (in dollars and size) than the employer that has a fleet of trucks, the driver is making a similar type of investment as the employer and a sufficient investment so that the driver can operate independently in that industry — suggesting independent contractor status.

Accordingly, the DOL is revising the last sentence of the proposed regulatory text for the investments factor to be two sentences and to read:

“The worker’s investments need not be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of investments or the sizes of the worker and the potential employer. Instead, the focus should be on comparing the investments to determine whether the worker is making similar types of investments as the potential employer (even if on a smaller scale) to suggest that the worker is operating independently, which would indicate independent contractor status.”

What about the “ABC” test?

Many employers have wondered (and worried) about the federal final independent contractor rule morphing into an ABC-type law, which has been an Achilles heel for motor carriers across the country.

The California law known as AB 5 makes it harder for employers to claim that workers are independent contractors. Under AB 5, a worker is assumed to be an employee and not an independent contractor unless:

A.The person is free from the control and direction of the hiring entity in connection with the performance of the work,

B.The person performs work that is outside the usual course of the hiring entity’s business, and

C.The person is customarily engaged in an independently established trade, occupation, or business.

These three prongs together are referred to as the “ABC” test. And it’s the “B” prong of the test that is troublesome for motor carriers because leased contract drivers are in the same business as motor carriers.

The federal final rule does NOT mimic California’s rule. The DOL states the “ABC” test is inconsistent with Supreme Court precedent interpreting the FLSA, and as such, cannot be adopted without Supreme Court or congressional alteration of the applicable analysis under the FLSA. In other words, the DOL is not adopting an ABC test because the totality-of-the-circumstances test of this final rule stands in stark contrast to an “ABC” test.

This might seem to be a win for motor carriers, but American Trucking Associations President and CEO Chris Spear issued the following statement about the final rule:

“The trucking industry has used independent contractors since the inception of interstate trucking, and court decisions over the last 90 years have continually reaffirmed the legitimate role ICs play in the economy. It's unfortunate that the Administration has chosen to replace a clear and straightforward standard with a tangled mess that weakens our supply chain and undermines the livelihoods of hundreds of thousands of truckers across the country.”

What about labor law posters?

This final rule is not expected to bring a mandatory change to the Employee Rights Under the Fair Labor Standards Act poster. The poster currently notes that it is important to know the difference between employees and independent contractors but does not provide details about the issues addressed in the final rule. As a result, a poster update will not be needed.

What’s next?

For now, the final rule will proceed as written. However, challenges to the rule are anticipated. It has already been reported that legislators are planning to introduce a Congressional Review Act resolution to repeal the rule, as many businesses and business groups are not happy with it.

Employers should note, a worker cannot voluntarily waive employee status and choose to be classified as an independent contractor.

In the meantime, employers should ensure they’re complying with all federal, state, and local employment laws, and prepare for this federal independent contractor final rule to take effect in March.

Key to remember: Employers should prepare for the independent contractor rule to take effect in March. It uses a multifactor analysis to assess whether a worker is an employee or an independent contractor under the FLSA. The rule allows all factors to be weighed equally and uses the longstanding interpretation of the economic reality factors.