from the editors of FELI

On January 9, 2024, the Department of Labor’s (DOL) Wage and Hour Division (WHD) issued its long-awaited regulation “Employee or Independent Contractor Classification Under the Fair Labor Standards Act.” The new rule will have a huge effect on the economy, particularly with respect to construction, trucking, health care, and the entire “gig economy,” which appears to be a target of the regulation.

Seven Factors

According to the new rule, the determination of whether a worker is an employee or independent contractor focuses on whether the worker is either economically dependent on the employer for work or in business for themselves. The new rule uses seven factors to help make that determination. This reverses the 3-year-old rule that had focused on two factors—whether there was direct control over someone’s work and whether the worker had an opportunity for profit and loss, with the other factors reduced to secondary considerations.

With the new rule, all factors will be weighed equally under a totality of circumstances analysis, which, inevitably, creates ambiguity and uncertainty for all parties involved.

The economic factors of the new rule are:

• Opportunity for profit or loss depending on managerial skill;
• Investments by worker and the potential employer;
• Degree of permanence of work relationship;
• Nature and degree of control;
• Extent to which work performed is integral to employer’s business;
• Skill and initiative; and
• Additional factors (if they in some way indicate whether the worker was in business for themselves or economically dependent on employer for work).

Certain factors—such as the nature and degree of control and whether a worker is “integral” to a business—are already raising concerns. The WHD explanation of the control factor, for example, states that reserved control (a contractual right to oversee or supervise work)—even if never used—can be an indicator of employee status. Similar ambiguity surrounds the classification of a temporary worker with particular skills hired for a short-term project that is part of a business’ normal activity. Is such a worker now to be considered an employee, or do the other factors outweigh that determination?

Future guidance or enforcement may clarify those questions, but many businesses are complaining that hiring and classifying a worker shouldn’t be so difficult and shouldn’t come with the possibility of a lawsuit.

Equally controversial are WHD’s explanations of other factors. The long discussions of worker investments and permanence of relationship, for example, clearly indicate that Uber and Lyft (and similar gig companies) are being targeted. The discussions explain why being able to set your own schedule, work for others, and use your own vehicle do not make you an independent contractor. Also, the very long section on why reserved rights in a contract can indicate employment is being construed as an attack on the franchise and contract labor business models and a backdoor regulation of joint employment in support of the National Labor Relations Board (NLRB).

Legal Challenges

The regulation becomes final on March 11, 2024. Significantly, it includes a private right of action, allowing an individual to file suit without the DOL’s involvement, which increases the possibility of litigation. Further, the rule doesn’t displace other federal regulations on the same subject, nor does it affect the numerous state and municipal worker classification laws that have been enacted in the past few years.

Lawsuits seeking to block the new regulation have already been filed. In an unusual move, a business coalition filed a legal challenge to the new rule, seeking to revive previous litigation that blocked the DOL’s 2022 effort to revise classification standards.

As in 2022, the new pleading argues the agency continues to violate the required administrative procedures for passing new federal regulations. The coalition is asking the U.S. 5th Circuit Court of Appeals to send their previously stayed case back to the U.S. District Court for the Eastern District of Texas to consider a fresh challenge to the rule. Other more direct challenges to the new regulation are promised from a variety of well-funded sources, and a judicial battle royale is certain to ensue.