DOL’s Rule Narrows Scope of Independent Contractor Classification

The new independent contractor rule from the U.S. Department of Labor (DOL) could spark an increase in misclassification lawsuits and make businesses less likely to hire gig workers, according to some legal experts.

The final rule restores an earlier standard that required companies to weigh a variety of economic factors together to determine whether a worker is an employee or an independent contractor. It will take effect on March 11.

Many businesses are familiar with how to comply with the earlier standard that existed before 2021, said Allan Bloom, an attorney with Proskauer in New York City.

“It should not be a strange test to employers,” he said. “We’re back to where we were in the past. At the end of the day, it’s the courts that really have the power to make that determination” about whether an employer misclassified a worker.

The new rule returns to a more employee-friendly standard, and it may usher in a wave of misclassification lawsuits under the Fair Labor Standards Act (FLSA), said Mark Goldstein, an attorney with Reed Smith in New York City.

“The new rule is both extremely vague for businesses yet extremely inflexible for the independent workforce,” said Tim Taylor, an attorney for Holland & Knight in Tysons, Va. “The last 20 years have seen dynamic technological advancements that let people work where they want, when they want, for whom they want, as much as they want. The new rule threatens that progress for workers.”

The final rule has major ramifications for the gig economy because app-based platforms have typically classified their delivery drivers and other gig workers as independent contractors. Industries such as construction, transportation, trucking and media could be significantly impacted, as well, Bloom said.

The regulation will make companies more wary of hiring short-term contractors, said Wayne Weingarden, an economist with the Pacific Research Institute, a nonpartisan, free-market think tank in Pasadena, Calif. It’s “particularly problematic for small businesses because they don’t have the staff or the money to deal with compliance,” he said.

Background

Under the FLSA, employees are entitled to minimum wage, overtime pay and other benefits. Independent contractors are not entitled to such benefits, but they generally have more flexibility to set their own schedules and work for multiple companies.

The DOL’s final rule rescinds a 2021 rule in which two core factors—control over the work and opportunity for profit or loss—carried greater weight. Under the new rule, employers would use a totality-of-the-circumstances analysis, in which none of the factors carry greater weight.

The new test includes six factors:

• The degree to which the employer controls how the work is done.
• The worker’s opportunity for profit or loss.
• The amount of skill and initiative required for the work.
• The degree of permanence of the working relationship.
• The worker's investment in equipment or materials required for the task.
• The extent to which the service rendered is an integral part of the employer's business.

Other relevant factors can be considered, as well.

Opponents Voice Concerns

The final rule drew quick criticism from some business groups.

The rule “is clearly biased towards declaring most independent contractors as employees, a move that will decrease flexibility and opportunity and result in lost earning opportunities for millions of Americans,” said Marc Freedman, vice president of workplace policy for the U.S. Chamber of Commerce in Washington, D.C. “It threatens the flexibility of individuals to work when and how they want and could have significant negative impacts on our economy.”

The DOL “is repealing common-sense rules that clearly articulate the difference between employees and independent contractors,” said David French, senior vice president of government relations for the National Retail Federation in Washington, D.C. The retail organization “vehemently opposes a change in this important area of law, which is both unwarranted and unnecessary,” he added.[KK1]

The DOL “intends to further complicate an already-confusing classification process for small business owners,” said Beth Milito, executive director of the Small Business Legal Center of the National Federation of Independent Business in Washington, D.C. The multifactor test “will lead to more frequent worker misclassification and frivolous lawsuits.”

SHRM’s Position

In public comments to the DOL, SHRM said the “totality of the circumstances” test will require more time and resources to apply, creating more confusion and uncertainty for employers.

The DOL’s action “underscores the importance of clear and consistent regulations, fostering diverse business relationships essential for the demands of the modern economy. HR plays a vital role in ensuring proper worker classification,” said Emily Dickens, SHRM’s chief of staff, head of public affairs and corporate secretary, in a statement on Jan. 9. “However, the ongoing shifts in regulatory guidance impose compliance burdens and legal uncertainties on HR professionals and business executives."

Tips for HR

In light of the new standard, HR professionals and employers should have class-action waivers in all arbitration agreements that they use with independent contractors, Bloom said.

In addition, HR should take an inventory of all the classifications for their workers with a 1099 tax arrangement, he said. Make sure HR knows when, how and where independent contractors are engaged and what types of agreements the company is using, “rather than 100 people across the company doing it differently,” he recommended.

Rob Boonin, an attorney with Dykema in Ann Arbor, Mich., predicted the new rule will be challenged in court before it goes into effect. “It’s really vulnerable to a legal challenge,” he said.

Likewise, Andrew McKinley, an attorney with Seyfarth in Atlanta, said, “While the rule will inevitably be challenged in court, workers and businesses will be left to wrestle with the meaning of the Department’s uncertain guidance, its legal viability and, ultimately, whether it will shift again with future administration changes.”

Sen. Bill Cassidy, R-La., ranking member of the Senate Health, Education, Labor and Pensions Committee, announced he will introduce a Congressional Review Act resolution to repeal the rule.