DOL Issues New Independent Contractor Rule

On January 10, 2024, the U.S. Department of Labor (DOL) published a final rule impacting the classification of workers as either independent contractors or employees. Effective March 11, 2024, this rule — titled Employee or Independent Contractor Classification Under the Fair Labor Standards Act — reinstates a pre-2021 multi-factor test under the Fair Labor Standards Act and rescinds the simpler two-factor test used previously. This change will make it harder to classify workers as independent contractors under federal law.

The new independent contractor rule adopts a “totality of the circumstances” test, weighing the following six key factors without prioritizing any:

• Degree to which the potential employer controls the work;
• Worker’s profit or loss opportunity;
• Worker’s and potential employer’s investments in equipment and materials;
• Degree of permanence of the work relationship;
• Worker’s skill level; and
• Extent to which the work is an integral part of the potential employer’s business.

The DOL asserts that this rule aligns with contemporary economic realities and offers better protection for workers. However, critics argue that the new rule will require more time and analysis to apply, thereby creating more uncertainty and liability for employers. Although this independent contractor rule could face legal challenges, businesses should still prepare for its implementation.

What Does This Mean for California Employers?

For companies employing workers in California, the DOL rule won’t alter their approach to classifying workers as employees or independent contractors because California adheres to a stricter test for determining employment status. To recap, the ABC test under California law presumes an individual is an employee unless the hiring entity demonstrates each of the following criteria:

• That the worker is free from control and direction of the hiring entity in connection with the performance of the work;
• That the worker performs work that is outside the usual course of the hiring entity’s business; and
• That the worker is engaged in an independent business of the same nature as the work performed for the hiring entity.

If hiring entity is unable to prove that the individual worker meets all three of the above criteria, the worker will be classified as an employee rather than an independent contractor.

While the DOL’s recent independent contractor rule is not the same as California’s ABC test, its impact is anticipated to extend to businesses with employees outside of California. Consequently, it’s essential for multi-state employers to conduct a thorough review of their worker classification procedures. This review should consider both the federal guidelines and relevant standards specific to each state where work is being performed.

Employers can review additional guidance on the new rule from the DOL on its Frequently Asked Questions page.

Vanessa M. Greene, J.D., Employment Law Subject Matter Expert, CalChamber

CalChamber‘s free white paper, A Roadmap to California’s Worker Classification Law, discusses the ABC test, exceptions to the test and much more (members can read it here). Not a member? Learn how to power your business with a CalChamber membership.