Navigating the DOL Independent Contractor Final Rule 2024
Should a particular worker be classified as an employee or an independent contractor (IC) under federal and state law? It's an issue that's plagued U.S. employers — and employment lawyers — for decades. Although the U.S. Department of Labor (DOL) recently tried to simplify the matter with a 2024 final IC rule, a recent U.S. Supreme Court ruling casts considerable doubt on whether the DOL’s rule will be followed.
The DOL Weighs In on Worker Classification — Twice
The Trump administration-era DOL published a rule in 2021 to resolve the worker classification issue in the context of the federal Fair Labor Standards Act (FLSA). A few years later, however, the Biden-administration-era DOL rescinded the 2021 rule and replaced it with a 2024 final rule, which went into effect March 11, 2024.
Why Does It Matter How Workers Are Classified Under the FLSA?
Employees are entitled to certain protections under the FLSA, including minimum wage and overtime pay, while independent contractors are not. This means it can be cheaper for hiring entities to use independent contractors. And that, in turn, means unscrupulous employers looking to save money may purposefully misclassify workers as independent contractors even though they should have employee status.
Misclassification can lead to serious consequences, both for the worker (who loses out on pay and other FLSA protections) and for the potential employer (who can end up with DOL fines as well as lawsuits brought by misclassified workers).
It’s Not the Label — It’s the Legal
Simply labeling a worker an independent contractor doesn’t make them one, nor does having them sign an agreement that declares them to be an independent contractor. What matters is what classification the worker actually deserves according to the law.
What Does the FLSA Say About How to Classify Workers?
Not enough, unfortunately. Although the FLSA defines “employee,” it doesn’t define “independent contractor” — likely because the FLSA was written in the 1940s, when independent contractors weren’t as prevalent as they are now.
Legal Precedent
For decades, the DOL and courts have agreed that whether someone should be given employee or independent contractor status under the FLSA comes down to the “economic reality” of the working relationship — i.e., whether a worker is “economically dependent” on the hiring entity. Workers who are economically dependent are considered employees, while those who aren’t are considered independent contractors.
How to Determine the Economic Reality of the Working Relationship
In analyzing whether economic dependence exists between the worker and hiring entity, the DOL and courts have looked at a number of factors, including the following:
Opportunity for profit or loss
Investment in the work
Whether the working relationship is temporary
Control over the work
Whether the work is an integral part of the hiring entity’s business
The use of special skills
“Totality of Circumstances”
Historically, the DOL and courts have analyzed economic reality under a “totality of circumstances” test, which means no single factor weighs more than any other. And it’s not a matter of checking off a certain number of boxes. If an examination of all factors points to economic dependency, the worker has employee status; if not, they have independent contractor status.
The DOL 2021 Rule: 5 Factors and a New Test
When the DOL issued its 2021 IC rule, it broke from judicial precedent in two ways:
Number of Factors
The 2021 rule listed only five factors, eliminating investment in the work.
Designation of “Core Factors”
The 2021 IC rule designated two factors — opportunity for profit or loss and control over the work — as “core factors” and assigned them the greatest weight, giving the remaining three less significance.
DOL’s Concerns About the 2021 IC Rule
In re-examining the old rule a few years later, the DOL decided the old rule was inadequate for two reasons.
The 2021 Rule Didn’t Follow Judicial Precedent
Because the prior rule’s use of a “core factors” test was a departure from judicial precedent, the DOL was concerned courts might not follow the 2021 rule.
The 2021 Rule Could Lead to Misclassification of More Workers
The DOL was also concerned that the prior rule was confusing and this could lead to more workers being incorrectly classified as independent contractors rather than employees. This would harm parties on both sides of the working relationship:
Misclassified workers would be deprived of the FLSA’s wage, overtime pay, and other protections.
Business owners who properly classified workers as employees (who are more costly to utilize) would suffer when competing with businesses that cut costs by unlawfully classifying workers as independent contractors.
The DOL 2024 IC Rule: Back to 6 Factors and the Old Test
The DOL’s 2024 IC rule returns to long-standing judicial precedent, once again using all six factors and the “totality of circumstances” test. In the DOL’s view, this will eliminate confusion about worker classification, provide consistency, and protect workers from being misclassified.
Does the DOL Final Rule Govern Worker Classification in All Contexts?
No. The DOL final rule governs worker classification only for purposes of the FLSA; it doesn’t apply to other federal or state laws. The same worker could have employee status under the FLSA and independent contractor status under other federal laws (such as the Internal Revenue Code or the National Labor Relations Act) or different states' laws.
The Overturning of the Chevron Doctrine: Effect on the IC Rule
The Chevron doctrine (named after the Supreme Court’s 1984 ruling in Chevron U.S.A. v. Natural Resources Defense Council, Inc.) held that if a federal statute was silent or ambiguous on an issue, the courts must defer to the relevant agency’s interpretation. Under Chevron, courts considering the worker classification question under the FLSA would have had no choice but to follow the final IC rule.
When Was Chevron Overturned?
On June 28, 2024, the Supreme Court, in Loper Bright Enterprises v. Raimondo, overruled the Chevron doctrine. Instead of automatically deferring to a federal agency in the event of statutory silence or ambiguity, the Court held that courts “must exercise their independent judgment in deciding whether an agency has acted within its statutory authority” in interpreting the statute.
Will Loper Bright Affect the DOL Rule?
Very likely. The Loper Bright ruling means courts aren’t required to automatically follow the DOL’s 2024 rule when considering worker classification. Instead, each court will decide on its own whether the DOL had authority to issue the new rule. If the answer is no, the court may ignore the final rule and opt instead to apply a different test. This could lead to a patchwork of tests for FLSA worker classification and a nightmare for potential employers, particularly those who operate in multiple states.
What Does California Law Say About Worker Classification?
It’s unclear at the moment — at least for certain classes of gig workers, such as drivers for Uber, Lyft, DoorDash, and other app-based transportation companies.
The “ABC Test” — Workers Have Employee Status Unless 3 Factors Are Met
The worker-friendly “ABC test” has been settled law in California since the California Supreme Court’s 2018 ruling in Dynamex Operations West, Inc. v. Superior Court.
The ABC test states that a worker must be given employee status unless the hiring entity can show all three of the following:
The worker, not the hiring entity, controls the work.
The work is outside the course of the hiring entity’s usual business.
The worker is customarily engaged in a business, trade, or occupation that is independent of the hiring entity.
AB 5 Exempts Some Gig Workers From ABC Test but Not Rideshare Drivers
In 2019, the California legislature codified the ABC test in Assembly Bill (AB) 5. Notably, AB 5 exempts some classes of gig workers from the ABC test, allowing them to be given independent contractor status. However, AB 5 does not exempt app-based transportation workers like Uber, Lyft, or DoorDash drivers, meaning those companies must give their workers employee status — a costly situation for rideshare companies.
>>Read More: New California Law Addresses the ‘Independent Contractors vs. Employees’
Prop 22 Carves App-Based Transportation Drivers out of AB 5
Proposition 22 (Prop 22) provides an end run around AB 5 for app-based transportation services such as Uber and Lyft, permitting them to classify drivers as independent contractors as long as certain conditions are met. California voters passed Prop 22 in November 2020. Some drivers challenged Prop 22 as unconstitutional, but on July 26, 2024, the California Supreme Court upheld the new law. It remains to be seen whether other states will follow California’s lead.
Potential Employers and Their Lawyers Will Need to Stay on Their Toes
With both the DOL independent contractor rule and California’s Prop 22 in limbo, hiring entities — and their employment lawyers — will need to stay up to date on the moving target of worker classification or risk finding themselves on the wrong side of the law and the losing side of the courtroom.
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