Wednesday, January 10, 2024: US DOL‘s WHD Published Its “Employee or Independent Contractor” Classification Final Rule
The U.S. Department of Labor’s (“DOL”) Wage and Hour Division (“WHD”) published its much anticipated and highly controversial Final Rule to revise the legal test it uses to analyzes whether a “worker” (neutral term) is an “employee” subject to jurisdiction under the Fair Labor Standards Act (“FLSA”) or an “independent contractor” the FLSA does not cover. This final rule rescinds a Trump Administration Rule published on January 7, 2021. The new Final Rule is slated to take effect on March 11, 2024.
The WHD announced the Final Rule in a press release on Tuesday, the day before its official publication in the Federal Register. Early Tuesday morning, multiple news outlets reported about a Monday evening press call in which the Biden Administration discussed the upcoming Final Rule.
One of the odd legal circumstances surrounding this Rule is that administrative law requires that federal Executive Branch agencies, like the USDOL and its WHD, enforce the statute the Congress passed and write implementing Rules (i.e., “regulations” in street talk) explaining how the agencies will faithfully enforce the Congressional intent embodied in the authorizing statute. Federal Executive agencies may not just make up their own intent and embody that different intent in a Rule allegedly implementing the Congressional intent.
Punchline: The WHD is not “writing on a blank slate.” No federal court ever struck down the Trump Rule as inconsistent with Congress’ intent underlying the FLSA, despite legal challenge. It seems like a far stretch for the WHD to now publish and seek to enforce a different Rule interpreting a central term critical to enforcement of the FLSA (what is an “employee”). Without amendment to the FLSA, the agency interpretation needs to faithfully stay consistent over the life of the statute, until the Congress changes it. For the WHD to now argue that its new Rule is consistent with the Congressional intent (like it did when it published the Trump Rule in 2021) and that the Trump Rule did not properly interpret the FLSA seems at best two-faced, if not also legally challenged. How can a statute mean so many different things without Congressional change?
One is reminded of the famous colloquy in Lewis Carroll’s children’s book “Through the Looking Glass” when Alice wonders how people can twist words around to suit their self-interested and parochial objectives:
“When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master—that’s all.”
The Department posted a “Fact Sheet” and created a landing page with links to an FAQ and other resources corresponding to the Final Rule. WHD Administrator Jessica Looman also discussed the new Rule in a blog post.
What Are the Revised Criteria?
The Trump Administration Rule used an “economic realities” test that focused on two core factors:
- the nature and degree of the worker’s control over the work; and
- the worker’s opportunity for profit or loss.
If those two factors conflicted, then the DOL would consider three other factors:
- the amount of skill required for the work;
- the degree and permanence of the working relationship between the worker and the potential employer; and
- Whether the work is an integral part of the hiring company’s business.
The modified test under the new Biden Administration Final Rule has six factors and it uses a “totality-of-the-circumstances analysis” test in which the six factors do not have a predetermined weight and are considered in light of the economic reality of the whole activity. Those six factors are:
- Opportunity for profit or loss depending on managerial skill,
- Investments by the worker and the employer,
- Permanence of the work relationship,
- Nature and degree of control,
- Whether the work performed is integral to the employer’s business, and
- Skill and initiative.
Additional factors may be considered as well if they are relevant to whether the worker is in business for themself, as opposed to being economically dependent on the hiring entity for work.
Factors Not Considered
According to its “Fact Sheet,” the WHD also now maintains that certain factors are not relevant to whether an employment relationship exists:
- How the hiring entity refers to the worker. A worker may be an employee under the FLSA regardless of the title or label they are given;
- A worker who is paid “off the books” or receives a 1099 is not necessarily an independent contractor,
- Agreeing verbally or in writing to be classified as an independent contractor – including by signing an independent contractor agreement – does not render a worker an independent contractor;
- Other facts, such as the place where work is performed, whether a worker is licensed by state/local government, and the time or mode of pay are not determinative.
How We Got Here
The WHD published its proposed version of the Rule in the Federal Register on Thursday, October 13, 2022. We discussed that proposal and the previous Trump Administration Rule in detail here. The comment period on the proposal closed on December 13, 2022, with approximately 54,400 comments submitted. The WHD detailed its response to those comments in the preamble to the Final Rule here.
The DOL submitted the Final Rule to the White House Office of Management and Budget (“OMB”) for review on September 28, 2023, and the OMB approved it on January 2, 2024. In the Fall 2023 Regulatory Agenda, the WHD set November 2023 as its target date for publication of the Final Rule. Thus, the WHD published it approximately two months behind schedule.
Changes from the Proposed Rule
The Final Rule largely adopted the proposed version with some modifications. In the preamble to the Final Rule, the WHD discussed at length the changes in the Final Rule compared to its NPRM. More succinctly, in its FAQ the DOL stated that it, after considering the public comments, “made several adjustments to the analysis that was proposed in the NPRM, including revisions regarding the control factor and the investment factor. For example, the final rule states that actions taken by the potential employer for the sole purpose of complying with specific, applicable federal, state, tribal, or local law or regulation would not indicate ‘control.’ The final rule also advises that costs to a worker which are unilaterally imposed by a potential employer are not ‘investments’ indicative of independent contractor status.”
In addition, the FAQ details the similarities and differences between the Biden Administration Final Rule and the now-rescinded Trump Administration Rule.