Department of Labor Issues Final Rule for Employers to Classify Workers as Independent Contractors

On January 6, 2021, the U.S. Department of Labor (DOL) published its final rule on worker classification, which establishes a new, simpler framework for employers to assess whether workers may be classified as independent contractors. As is typical for publication of such regulations, the final rule is scheduled to take effect 60 days after publication (March 8, 2021), well after the upcoming change in administrations.

The DOL’s multifactor framework laid out in the final rule generally is unchanged from the DOL’s original proposed rule. In our prior Alert, we outlined the DOL’s multifactor test for determining which workers may be considered independent contractors who are not subject to the minimum wage, overtime and other requirements of the Fair Labor Standards Act (FLSA), as opposed to employees who are covered by the FLSA. Under the DOL’s new test, the worker’s economic dependence on the potential employer is the ultimate inquiry for determining whether a worker may be classified as an independent contractor. The test looks first to two key factors: (1) the worker’s control over their own work; and (2) the worker’s opportunity for profit or loss based on the work performed. If examination of these core factors point to the same conclusion, the analysis may be complete. Three additional factors may be considered for additional guidance (i) the amount of skill required for the work performed; (ii) the permanence of the working relationship; and (iii) how integrated the worker’s position is to the employer’s overall function.

The final rule provides specific examples of how the new test may apply to certain work performed in certain industries, including truck driving, construction, freelance journalism and gig-economy household repairs. These examples should be helpful not only to employers in those industries, but to all employers faced with difficult classification decisions.

In addition, the final rule includes new language stating that an employer’s providing health, retirement or other benefits to a worker is not necessarily indicative of employee status, especially where the benefits provided to independent contractors are different from those provided to employees. This raises the possibility that for the first time employers may be able to move away from an all (employees) or nothing (independent contractors) approach to worker benefits that long has been a clear line for worker classification under the FLSA.

What This Means for Employers
If the final rule becomes effective, it will provide a clear, DOL-endorsed test to use when classifying workers as independent contractors that is more business-friendly than prior guidance. However, the Biden administration has indicated its intent to issue an executive order as soon as Inauguration Day that would halt or delay the effective date of the Trump administration’s “midnight regulations” issued after the election. It is also possible that the U.S. Senate and House of Representatives―both with Democratic majorities (with Vice President-elect Harris as the tiebreaking vote in the Senate, if needed)―could use the Congressional Review Act to invalidate the final rule (amongst numerous other Trump administration regulations issued in the waning months of the administration). Alternatively, the DOL may choose not to defend any legal challenges to the final rule, which are likely.

Importantly, employers must always remember that applicable state laws and court decisions may dictate use of different independent contractor tests that are not impacted by the final rule.

We strongly encourage employers to carefully review existing independent contractor and employee classifications, as well as decisions regarding classification of newly engaged workers, with the assistance of counsel.

Azevedo Sette Advogados