January 12, 2024Client Alert

DOL Issues Final Independent Contractor Rule

On January 8, 2024, the Department of Labor (DOL) issued a final rule on independent contractors.  While employers should expect that there will be legal challenges to the rule, and that such challenges may result in a delayed effective date, the rule is currently scheduled to be effective on March 11, 2024.  Regulatory changes like this one offer a good opportunity for employers to review and, if necessary, address situations that may be questionable.

In the rule, the DOL expressed an intent that the focus of any independent contractor inquiry be on the economic realities of the worker’s relationship with the “potential employer” to determine whether the worker is either (1) economically dependent upon the potential employer for work; or (2) in business for themself.  The DOL set forth six factors to engage in this inquiry, but cautioned that no factor is intended to be determinative and that the totality of the circumstances must be considered. 

The six factors are: 

  1. Opportunity for profit or loss depending upon managerial skill.  The relationship is more likely to be that of an independent contractor where the worker: (i) can determine or meaningfully negotiate the charge or pay received for the work provided; (ii) can accept or decline jobs or chose the order/time in which jobs are performed; (iii) engages in marketing, advertising, or other efforts to expand business or secure more work; and (iv) makes decisions to hire others, purchase materials or equipment, rent space.
  2. Investments by worker and the potential employer.  This factor considers evidence that the worker’s investments are entrepreneurial in nature and serve a business-like function – stated another way, the nature of any resources the worker has invested in the work.  Investments that increase the worker’s ability to do different types of or more work, reduce costs, or extend market reach are investments that suggest an independent contractor relationship. For example: a worker using her personal vehicle to perform work. Whether this qualifies as a capital or entrepreneurial investment will depend on the totality of the circumstances. If a worker already owns a vehicle for her personal use and then modifies, upgrades, or customizes the vehicle to perform work, the worker’s investment in modifying, upgrading, or customizing the vehicle could be a capital or entrepreneurial investment.  Where any vehicle is suitable to perform the work, purchase of the vehicle is generally not a capital or entrepreneurial investment.

    Thus, the DOL intends to look at the worker’s investments relative to the potential employer’s investments in the overall business – i.e. is the worker making similar types of investments as the employer to suggest that the worker is operating independently?  Note, though, that the costs to a worker of tools and equipment to perform a specific job, costs of workers’ labor, and costs that the potential employer imposes unilaterally on the worker are not evidence of capital or entrepreneurial investment and are evidence of employment status.
  3. Degree of permanence of the work relationship.  Where the work relationship is indefinite in duration, continuous, or exclusive to the potential employer, the relationship will lead toward an employer/employee relationship.  Similarly, where the work relationship is project-based and/or involves sporadic-based performance, the factor will favor an independent contractor relationship. 
  4. Nature or degree of control.  Where the potential employer exerts control over the performance of the work and the economic aspects of the working relationship – including setting the schedule, supervising the performance of the work (including technological supervision), or where the worker is limited in the ability to work for others (due to schedule, inability to work for others when they choose) – the factor will be considered more employer/employee. 
  5. Extent to which the work performed is an integral part of the potential employer’s business.  Where the worker’s work is critical, necessary, or central to the potential employer’s business, the factor will weigh in favor of employer/employee status.
  6. Skill and initiative.  Where the worker is not using specialized skill in performing the work or the worker is dependent upon training from the potential employer, the relationship will be more indicative of employer/employee.

While the rule is final, its implementation remains to be seen. Employers utilizing independent contractors should continue to examine those relationships and determine if changes are necessary. If you have any questions about this rule or its impact on your operations, please contact your Michael Best attorney.

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