The U.S. Department Of Labor's New Independent Contractor Test

• Published date: 23 January 2024
• Subject Matter: Employment and HR, Contract of Employment, Employee Benefits & Compensation
• Law Firm: Lewis Brisbois Bisgaard & Smith LLP
• Author: Mr Peter T. Shapiro and Brian Pete

New York, N.Y. (January 17, 2024) - Employers around the country should take note of the recent release of the long anticipated new rule adopted by the U.S. Department of Labor (DOL) that describes the test to be utilized to determine whether an individual should be classified as an employee or independent contractor under the Fair Labor Standards Act.

While it remains to be seen how deferential the federal courts will be to this rule, the rules of the game are now fairly clear for matters that the DOL is investigating. And it appears fair to say that the DOL will lean in favor of finding an employment relationship in the majority of contested matters. The new rule takes effect on March 11, 2024.

This rule was first proposed in October 2022 and, after receiving extensive public comments, the DOL has now issued a final version. The rule provides a six factor balancing test, but also notes that the determination of an individual's status should turn on the economic realities of the relationship; i.e., "whether the worker is either economically dependent on the potential employer for work or in business for themselves." Broadly speaking, if the latter they are an independent contractor and if the former they are an employee. The DOL will continue to look at the totality of the circumstances to determine the worker's status. The courts have traditionally used an economic realities test, focused on whether the worker is economically dependent on the business to which service is being rendered or is in business for themselves, while looking at the totality of the circumstances. Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947); see, e.g., Donovan v. DialAmerica Marketing, Inc., 757 F.2d 1376 (3d Cir. 1985) (evaluating the totality of the circumstances and focusing on six factors to determine whether a worker is an employee).

The six factors that the DOL will weigh are as follows:

• The opportunity for profit or loss depending on managerial skill
• Any investment by the workers and the potential employer
• The degree of permanence of the relationship
• The nature and degree of the "employer's" control
• The extent to which the work performed is an integral part of the potential employer's business
• The skill and initiative involved

The DOL's rule includes commentary about each of these factors, which explain how each is to be evaluated. That commentary is briefly discussed below.

Factor 1: The facts potentially relevant to determining whether there is an...