On January 10, 2024, the U.S. Department of Labor (“DOL”) published a new and revised “final rule” setting out how the DOL will analyze whether a party is an employee or an independent contractor.  This new final rule for worker classification went into effect on March 11, 2024.   The question is what does the new federal independent contractor rule mean for companies in 2024?  

I. Background

The DOL’s new “final rule” gives updated guidance for who is considered an independent contractor or employee under the Fair Labor Standards Act (FLSA).1  The new final rule replaces and rescinds the Independent Contractor Status Under the Fair Labor Standards Act rule published on January 7, 2021 (“2021 IC Rule”).  The 2021 IC Rule was a five-factor test and was challenged in various court proceedings.  The new final rule introduces a six-factor text for determining the classification of a worker and applies a much broader interpretation of employee status.  This is an important development, as employees are entitled to FLSA’s wage and hour protections that are not provided for independent contractors.  

II. Independent Contractor Test on Federal Level

As indicated above, the new DOL final rule outlines the factors it will use to determine whether an independent contractor is truly an independent contractor and not a misclassified employee under federal law.  The criteria the DOL will be applying in this analysis of classification is as follows: 

1. The extent to which the work performed is an integral part of the employer’s business 

The first component is the most direct as it considers whether the work being done is integral to the employer’s business.  For example, a restaurant needs a chef and kitchen workers to cook the food or a dental hygienist is needed at a dentist’s office.  Their work is integral to being able to conduct the operations of the business.  

2. Whether the worker’s managerial skills affect his or her opportunity for profit and loss

This second factor primarily looks at whether the contractor can earn profits or suffer losses independently through their own effort and decision making.2  The DOL weighs whether the contractor sets their own prices, can accept or decline the work asked of them, has their own employees, markets their business to other clients and uses their own equipment.  

1.   https://www.federalregister.gov/documents/2024/01/10/2024-00067/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act 

2.  https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship 

3. The relative investments in facilities and equipment by the worker and the employer

This factor considers whether a contractor makes investments that support the growth of their separate business that are capital or entrepreneurial in nature.  The DOL evaluates if the contractor invests in their separate business by paying for their own equipment, marketing and other business needs that contribute to the overall success of their independent business.  

4. The worker’s skill and initiative 

This fourth factor weighs whether the worker uses his or her own specialized skills to provide services of an independent contractor or if the contractor requires training from the contracting company in order to render the proposed services.

5. The permanency of the worker’s relationship with the employer

This factor evaluates the nature and length of the work relationship between the parties.  An independent contractor is more likely to offer services that are “sporadic or project-based with a fixed ending date,” even if the projects are regularly occurring, but the contractor also has projects for other clients.3  Work that is continuous or if the contractor is solely working with one client could indicate an employee status.  

6. The nature and degree of control by the employer

This last criterion is where the DOL rules may lead to more reclassified independent contractors.  Prior analysis regarding control of independent contractors by the contracting company only considered whether the company had “direct control” such as whether it dictated the worker’s hours, supervised the performance of the services, set limitations on the contractor’s ability to work with other clients and/or had any say in the contractor’s prices for services.  The new DOL rules add a consideration of “indirect control” when determining independent contractor status.  This means that control implemented by a contracting company for the purposes of ensuring that the contractor complies with legal obligations or standards of the contracting company will also be taken into consideration for determining classification. 

All six of the factors have equal weight in the DOL’s evaluation of the worker’s classification.  However, certain factors may be more pertinent than others when applied on a case-by-case basis.  

III. Independent Contractor Test on California Level 

California has already undergone an overhaul of its worker classification standards under Assembly Bill 5 (“AB5”) passed in 2019 after the landmark decision in Dynamex Operations West, Inc. v. Superior Court case in 2018, which introduced the ABC three-factor test (“ABC Test”).4  The California ABC Test under AB5 for determining independent contractor or employee classification was refined by Proposition 22, which granted app-based ride share workers the status of independent contractors, but is still applicable to most businesses in California.  Under the ABC test, a worker is an independent contractor only if the hiring entity establishes all of the following:  (A) the worker is free from the control and direction of the hirer; (B) the worker performs work outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring company.5

3. Id.  

4. Dynamex Operations W. v. Superior Court, 4 Cal.5th 903, 914 (Cal. 2018). 

5. https://www.dir.ca.gov/dlse/faq_independentcontractor.htm. 

The first factor considers whether the independent contractor is being supervised, trained to conduct their work in a certain manner, or bound by the rules and policies of the company contracting their services.    The second factor of the ABC test indicates that the independent contractor must perform work outside of the usual course of business of the contracting company.  The third factor of the ABC test regards whether the “worker” is regularly contracted in their “independently established” business.  The ABC Test is considered one of the stricter tests for determining worker classification on the state level in any state.  

IV. What Companies Need to Do in the Wake of the New Guidelines

The DOL’s final rule is facing legal challenges by freelancers and businesses that rely on independent contractors.  It is also the subject of a pending Congressional bill which, if successful, would nullify the rule.  These challenges remain unresolved.  Companies, therefore, should review the applicable state rules governing their entity and compare them to the new DOL final rule guidelines.  Most companies in California should not have to reclassify their independent contractors already compliant under the ABC Test.  However, to ensure compliance and avoid future claims and liability due to misclassification, it is recommended that all companies review their contracts and business practices related to their independent contractors.  

Contact our offices for assistance in understanding what the new federal independent contractor rule means for companies in 2024 and how the DOL’s new final rule guidelines may affect your company’s independent contractor policies or contracts.