Who Is an Independent Contractor? The New (and Old) Rule

by Paul Ruden / January 16, 2024

The U.S. Department of Labor (DOL) has published the new final rule establishing the criteria for determining which workers are “employees” and which are “independent contractors.” The new rule is effective March 11, 2024. The official version may be read in the Federal Register at 89 FR 1638, January 10, 2024 (105 pages of fine print). DOL received more than 55,000 comments about the proposal.

DOL has previously addressed these issues in enforcement actions and in what is known as “subregulatory” documents, meaning published guidance lacking the formality of “regulations” but having much the same effect. The Trump administration changed the criteria in a rule effective January 2021 by altering the strength attributed to some of the factors and in other ways too pointless to describe given DOL’s new action. DOL has now reversed those changes and re-established the prior scheme, with some modifications, described below.

The most salient features of the new rule are:

1. The Trump administration’s 2021 revisions to the previous principles governing the determination of “employee vs. independent contractor” are rescinded even if most unlikely) the entirety of the new regulation is later invalidated by a court decision;

2. Going forward, the determination of IC status will be governed by the previous six criteria:

(a) opportunity for profit or loss depending on managerial skill;

(b) investments by the worker and the potential employer;

(d) nature and degree of control;

(e) extent to which the work performed is an integral part of the potential employer’s business; and

(f) skill and initiative.

3. The rules cannot be waived by a worker to qualify as an IC;

4. DOL has not adopted an ABC rule like the California rule that caused much controversy in 2019.

DOL has published a Frequently Asked Questions document at https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking/faqs#g3

If you want to see more detail about the six criteria, you may read summaries there.

The explanation of the final rule is long and complicated, but there are several points that bear emphasis for individual advisors and small independent advisor businesses:

1, DOL’s rejection of the ABC test is very helpful; you may recall that travel advisors escaped the impact of the California ABC test only through an explicit exemption granted through the legislation;

2. The six-part test for IC status is a “totality-of-the-circumstances” analysis; no single criteria is more important than any other; the tests may point in different directions; there is room in the analysis for a seventh factor as well: any other information that could bear upon the ultimate question: is the worker economically dependent on the potential employer for work or is the worker in business for herself?

3. DOL repeatedly states its emphasis on the totality-of-circumstances:

“The Act’s definitions are meant to encompass as employees all workers who, as a matter of economic reality, are economically dependent on an employer for work. A worker is an independent contractor, as distinguished from an “employee” under the Act, if the worker is, as a matter of economic reality, in business for themself. Economic dependence does not focus on the amount of income the worker earns, or whether the worker has other sources of income.”

4. Reasonable minds may differ as to whether the current DOL approach is better than the one put forward by the prior administration in 2021. Debating this is pointless as long as the current rules are in place; your focus should be on compliance.

5. The complexity of the analysis required by the rules has the benefit of permitting different arrangements to be defended precisely because the “totality-of-the-circumstances” standard can embrace so many business models. The problem rests in how to know, but that uncertainty existed before the latest set of rules and will continue to exist for the indefinite future.

6. DOL has stated that it does not expect the new/old rules to result in major reclassifications of workers, but that expectation assumes that prior to the rule’s adoption, most workers were properly classified.

What, then, should advisors and agencies do now if they have been using a business model involving independent contractors or are considering it for the future?

If the agency is affiliated with a host agency, you should look to that host for guidance. If you are an independent agency, you should consult with your legal counsel for advice about your compliance with the new rules. The likely biggest issue is going to be in businesses in which independent contractors and employees are working under the same corporate structure.

I suspect it is unlikely that DOL is going to expend scarce agency resources pursuing small individual firms about reclassification, although it is certainly possible it could do that to establish legal precedents it wants to make. It is certainly true that the rules, before and after all these changes, are complicated. In addition to DOL, there is the risk that a former IC will claim misclassification. For that reason alone, compliance is important. In that sense, among others, not much has changed.