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New Rule Narrows Classification for Independent Contractors

Employment law ebbs and flows, based on Presidential politics. The Trump DOL tried to rewrite independent contractor/employee rules to be more employer friendly. Now the Biden DOL “new final rule” tries to return to historical precedent.

25 January, 2024

This month the U.S. Department of Labor released its Final Rule that defines whether a worker is an employee or independent contractor. The DOL says it’s designed to reduce the number of employees who are misclassified as independent contractors. In other words, the new Final Rule is intended to narrow an employer’s ability to classify workers as independent contractors.

A little background…a fun little walk through IC History:

•    For 80 years, the IC/employee distinction was governed by six factors laid out by the Supreme Court in 1947. (Those factors are listed further below in this article.)

•    It’s always been a bit subjective to discern IC/employee status, and even some courts had conflicting views. Some employers used the gray area as cover to misclassify their workers as independent contractors rather than employees.

•    In the final weeks of the Trump administration in 2021, the DOL issued a new rule that essentially reduced the six-point test to two: the “nature and degree of the individual’s control over the work” and “the individual’s opportunity for profit or loss.” Many believed that this new rule made it easier for employers to classify workers as ICs.

•    When Biden took office, the DOL delayed implementation of the new rule and ultimately killed it, saying there was no reason to change 80 years of precedent and practice.

•    The topic ended up in the courts, with varying rulings, some stating the DOL was not allowed to terminate the implementation of the new, seemingly employer-friendly rule.

•    As the case was climbing through the courts, and in an attempt to clear up any loose ends, the DOL under the Biden Administration put forth a new rule. Its “Final Rule” was published Jan. 10, 2024 and is scheduled to take effect March 11, 2024.

•    As law firm Jackson Lewis describes it, “According to DOL, the 2021 IC Rule prohibited consideration of whether the work performed by the individual is central or important to the potential employer’s business. [Under this new Final Rule] the integral question asks not whether the worker’s role is an integrated unit of production but whether the worker’s role is an integral part of the potential employer’s business.

Wasn’t that a pleasant stroll?

But What’s It All Mean?

Bottom line, the new rule aims to return the IC/employee determination to be guided by the original six-factor process. Here are those six factors:

1.    Opportunity for profit or loss depending on managerial skill
2.    Investments by the worker and the potential employer
3.    Degree of permanence of the work relationship
4.    Nature and degree of control
5.    Extent to which the work performed is an integral part of the potential employer’s business
6.    Skill and initiative

The Final Rule states that “economic dependence is the ultimate inquiry for determining whether a worker is an independent contractor or an employee.” In other words, is the worker in business for himself or herself?

All that said, this Final Rule will be challenged in the courts, likely, ultimately in the now conservative-leaning and generally employer-friendly Supreme Court. Stay tuned but don’t hold your breath.

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