Department of Labor Releases Final Independent Contractor Status Rule

On Tuesday January 9, 2024, the Department of Labor (DOL) published its final rule setting forth how worker classification (i.e., whether a worker is an employee or independent contractor) will be determined by the agency under the Fair Labor Standards Act (FLSA). This issue is relevant to all industries engaged in interstate commerce regardless of size and is applicable to anyone currently working with independent contractors.

As you are likely aware, the FLSA does not apply to independent contractors. This means workers determined to be independent contractors are not subject to the same requirements as employees, such as FLSA provisions requiring minimum wage or overtime. The new rule, however, makes the ability to appropriately classify an employee as an independent contractor, as opposed to an employee, more difficult. Specifically, the new rule departs from the Trump Administration’s 2021 rule that had previously identified five economic reality factors to determine worker status, with an emphasis on two factors as more important than the rest – (1) the nature and degree of control over the relevant work and (2) an individual’s opportunity for profit or loss.

The DOL’s new rule maintains the economic realities test, but returns to a totality of the circumstances analysis, where each factor is afforded equal weight, with no one (or two) factors controlling. The relevant factors include: (1) opportunity for profit or loss depending on managerial skill, (2) investments by the worker and the potential employer, (3) the degree of permanence of the work relationship, (4) the nature and degree of control, (5) the extent to which the work performed is an integral part of the potential employer’s business, and (6) skill and initiative.

While all employers should ensure they are in compliance with this new rule, employers in the Northeast should already find themselves compliant if they are following the stringent tests utilized by the states in which they operate. Recall that in order to be properly classified as an independent contractor under both state and federal law, companies must be in compliance with state DOL rules as well as federal DOL rules as to FLSA compliance.

Below are descriptions of tests used by Connecticut, Maine, and Massachusetts for purposes of worker status under state wage and hour laws that illustrate this point.

Connecticut

Connecticut common law considers independent contractors to be worker’s who use their own methods without being controlled by the company, except as to work results. Factors related to the company’s control of the workers work include:

• Behavioral Control – where and when to do the work, what tools and equipment to use, what routines or patterns must be used, etc. The more control the company has, the less likely an independent contractor relationship exists.
• Financial control – reimbursing the worker’s business expenses, how the worker is paid, whether the worker has the opportunity for profit or loss, and if the worker makes their services publicly available. If the company restricts availability, reimburses expenses, or the individual is unable to control the ability for profit or loss, it is less likely that an independent contractor relationship exists.
• The parties relationship – any written contract, whether or not the worker received a W-2 or 1099-MISC, the worker can terminate their relationship with the other party, the worker is providing services as a recognized corporate entity, and the worker receives benefits that employees receive. The more the individual “looks” like an employee, receiving benefits and a W-2, or working without a contract, the less likely an independent contractor relationship exists.

Maine

Maine common law utilizes the control test to determine whether a worker is an independent contractor or an employee. The test considers the following steps:

• Is the individual free from direction or control of the employing unit?
• Does the individual have the essential right to control the means and progress of the work except as to final results?
• Is the individual customarily engaged in an independently established trade, occupation, profession, or business?
• Does the individual have the opportunity for profit and loss as a result of the services being performed for the other individual/entity?
• Does the individual hire and pay their assistants (if any) and to the extent that these assistants are employees, supervise the details of their work?
• Does the individual make their services available to some client or customer community even if their right to do so is voluntarily not exercised or is temporarily restricted?
• Whether the individual meets any of the 3 of the following elements:
  • The individual has a substantive investment in the facilities, tools, instruments, materials, & knowledge used by the individual to complete the work.
  • The individual is not required to work exclusively for the other individual/entity.
  • The individual is responsible for satisfactory completion of the work and may be held contractually responsible for failure to complete the work.
  • The parties have a contract that defines the relationship and gives contractual rights in the event the contract is terminated by the other individual/entity prior to completion of the work.
  • Payment to the individual is based on factors directly related to the work performed and not solely on the amount of time expended by the individual.
  • Such work is outside the usual course of the business for which the services are performed.
  • The individual has an IRS Determination (SS-8) of independent contractor status.

In Maine, however, the analysis goes in order. If the answer to any of the first six questions is no, then the individual cannot be classified as an independent contractor.

Massachusetts

Massachusetts law considers whether the work:

• Is done without the direction and control of the employer;
• is performed outside the usual course of the employer’s business; and
• the worker is customarily engaged in an independently established business, occupation, trade, or profession of the same nature as that involved in the service performed.

If the answer to any of the above questions is no, then again, it is less likely that the individual will be viewed as an independent contractor.

Companies must employ the state law in the location in which the individual is providing services—not the company’s headquarter state. As you can see, the state tests are extensive, varied, and while in some cases very similar to the new rule set forth by the DOL, in other cases are much more expansive. Employers should evaluate their classification practices and policies to ensure compliance in light of this new DOL rule.

If you have any questions concerning worker classification or FLSA compliance, please contact a member of Verrill’s Employment & Labor Team.