Vice President, Employment Policy, U.S. Chamber of Commerce
January 12, 2024
With much fanfare, but little surprise, on January 9, the Department of Labor unveiled its new regulation for classifying workers as either independent contractors or employees under the Fair Labor Standards Act. The final regulation, as expected, hews very closely to the proposed regulation and as such includes all of the problems the U.S. Chamber flagged in our comments and a previous article. It was published in the January 10th Federal Register and will take effect March 11.
The thrust of the regulation is to give the Department of Labor a stronger tool to classify more workers as employees rather than independent contractors. The DOL argues that this new regulation is necessary to go after employers who are misclassifying workers as independent contractors, but they are having no trouble doing that now under the current regulation that was implemented in 2021 and which this regulation explicitly rescinds. In reality, this new regulation changes the terms for determining whether someone is an independent contractor or employee, making more current independent contractors look like employees.
Changing the rules isn’t necessary to improve enforcement; it simply raises the bar so that more companies will now be out of compliance. While companies will still be able to use independent contractors, the new classification analysis tilts towards finding an employment relationship. Companies will need to carefully review their current independent contractor relationships to ensure they conform to the new rule. If a company is found to have misclassified a worker, that company will be subject to back pay and penalties under the FLSA, such as minimum wage and overtime compensation violations.
The following are highlights of the final regulation and problems the new regulation will cause:
- Totality of Circumstances Structure: The new regulation rescinds the 2021 regulation’s emphasis on control and opportunity for profit and loss, leaving employers unsure of which factors the DOL will use in determining whether a worker has been properly classified. This regulation, far from DOL’s assertions, leaves employers completely in the dark and guessing about their classification decisions. The exception to this will be if an employer classifies their worker as an employee. One can assume DOL will never challenge that classification.
- Open-Ended, Undefined Terms: Despite DOL disingenuously claiming that the rule includes six factors, it still includes the seventh catch-all factor referred to as “additional factors.” In other words, if DOL can’t prove an employment relationship using the six specific factors in the rule, there is a completely undefined factor that can be used to claim misclassification.
- Reserved Control: Under the analysis about who controls the work product of the worker, the final rule includes “reserved control” as did the proposed regulation. This term is not defined and could be used to conclude that the control factor supports finding an employment relationship.
- Compliance with Local, State, and Federal Laws and Regulations: The final rule pretends to pull back from using compliance with local, state, or federal laws and regulations as indicia of control, but in the next sentence says that if the potential employer has their own standards that could be indicative of control leading to employee status. This could create significant problems as most employers with a strong emphasis on workplace safety have their own safety programs that exceed OSHA standards, so if a company hires an IC to do some kind of work on their premise and says “here’s our safety program, follow it” they will be asserting control that could be cited by DOL as evidence of misclassification.
- California’s ABC Test: While DOL claims the rule does not implement the CA ABC test, it mirrors it very closely and DOL’s claim that the regulation does not reflect the ABC test leaves something to be desired. The ABC test requires that to be an independent contractor the worker must meet all of the following three factors: the company does not exert sufficient control on the worker; the work is outside the company's typical business; and the worker normally provides this type of work as an independent business. In the final regulation, control is an expected major factor, and whether the work done by the potential IC is outside the company’s typical business will be judged under the following language: “Extent to which the work performed is an integral part of the potential employer's business.” This is arguably the core of the ABC test and one that will likely be used to support a finding of employee status.
- Severability Clause: The Department has begun regularly including severability clauses in their regulations so that if one portion of it is struck down by a legal challenge, the remainder of the regulation can survive. In this regulation, that is understood to mean that if the new regulatory provisions are invalidated, the portion of this regulation rescinding the 2021 regulation would still take effect. This would effectively mean that there is no rule in place, and DOL would enforce the FLSA using their standards from before the 2021 regulation was implemented. In some ways, that approach would be very similar to the new rule, although not explicitly setting up the totality of circumstances analytical framework and including open-ended terms that were not present previously. It’s worth noting that in any court challenge to the rule, a judge is under no obligation to respect the severability language.
The Chamber is disappointed DOL finalized the regulation with very few changes and is weighing a legal challenge.
About the authors
Marc Freedman is vice president of workplace policy at the U.S. Chamber of Commerce. He develops and advocates the Chamber’s response to OSHA matters; FLSA issues such as overtime, minimum wage, and independent contractors; paid leave issues; EEOC, and other labor and workplace issues.