DOL Final Independent Contractor Rule Already Facing Legal Challenges

Following multiple delays, and after ongoing litigation stalled its previous rulemaking attempts, the U.S. Department of Labor issued its long-anticipated independent contractor final rule on Tuesday, January 10, 2024, establishing a six-factor economic realities worker classification test and rescinding a narrower rule issued near the end of the Trump administration in January 2021. While the Final Rule is set to take effect March 11, 2024, the Department is already facing legal challenges from business groups opposed to the new test.

DOL previously attempted to withdraw the Trump administration’s independent contractor rule just a few months after it was issued, preventing it from taking effect. However, a coalition of business groups including the Coalition for Workforce Innovation, Associated Builders and Contractors, Inc., Associated Builders and Contractors of Southeast Texas, and the Financial Services Institute, Inc., filed suit, and in March 2022, the Department’s Withdrawal Rule was vacated by the U.S. District Court for the Eastern District of Texas, which found DOL’s rulemaking failed to comply with certain statutorily required administrative procedures. Coal. for Workforce Innovation v. Walsh, No. 1:21-CV-130, 2022 WL 1073346 (E.D. Tex. Mar. 14, 2022).

Following an appeal by DOL, the United States Court of Appeals for the Fifth Circuit stayed the litigation, pending the Department’s completion of new rulemaking on the issue. Coal. for Workforce Innovation v. Walsh, Docket No. 22-40316 (5th Cir. May 16, 2022). The most recent stay expires February 6, 2024.

Now, DOL has issued its Final Rule, entitled “Employee or Independent Contractor Classification Under the Fair Labor Standards Act,” 89 Fed. Reg. 1638-01. The new rule rescinds the 2021 Trump administration rule and establishes a six-factor economic realities test for determining whether workers should be properly classified as “independent contractors” or as “employees” entitled to minimum wage, overtime pay, and other protections under the FLSA. The six non-exhaustive factors include:

• Opportunity for Profit or Loss Depending on Managerial Skill
• Investments by the Worker and the Potential Employer
• The Degree of Permanence of the Work Relationship
• The Nature and Degree of Control
• The Extent to Which the Work Performed is an Integral Part of the Potential Employer’s Business
• Skill and Initiative

These economic realities factors are not new and have been utilized, in various forms, by the Department and courts for over seventy-five years. However, until 2021, DOL had not issued any formal rule addressing the proper test for determining worker classification. And because the FLSA offers no statutory guidance for determining whether an individual is an independent contractor or an employee, application of the factors has been inconsistent with differing approaches emerging regarding the proper weight given to each.

Whereas the 2021 rule also included most of the above factors, it weighted some more heavily than others and focused the analysis on two “core” factors: 1) the nature and degree of control over the work and 2) the worker’s opportunity for profit or loss. Under the prior rule, if both core factors weighed in favor of the same classification, there was a “substantial likelihood” the classification was accurate. Independent Contractor Status Under the Fair Labor Standards Act, 86 Fed. Reg. 1168-01. In contrast, the new Final Rule emphasizes a “return to a totality-of-the-circumstances analysis in which the economic realities factors are not assigned a predetermined weight and each factor is given full consideration . . . .” 89 Fed. Reg. 1638-01.

While DOL has described the Final Rule as creating clarity and consistency regarding worker classification, business groups and others have raised concerns regarding potential impacts to workers and businesses engaged in the so-called gig economy. Indeed, in a motion filed Thursday, January 11, 2024, seeking to lift the stay in the Coalition litigation and remand the case to the district court for further proceedings, Plaintiffs describe the Final Rule as creating “a standard that is so vague, amorphous, and context-dependent, it provides virtually no certainty or assurance that any given worker is classified correctly as an employee or contractor.” Coalition, Docket No. 22-40316. DOL, in turn, moved the next day to vacate the district court’s judgment as moot based on the publication of the new Final Rule. Both motions are now fully briefed and pending adjudication by the Fifth Circuit.

Some federal lawmakers have also voiced opposition to the Final Rule, including Chair of the House Committee on Small Business Rep. Roger Williams (R-TX), and raised the possibility of repeal through congressional action. In a letter to Acting Secretary Julie Su dated January 18, 2024, Williams urged the DOL to delay implementing the Final Rule due to potential disproportionate impacts to small businesses and gig workers. According to Williams and the Small Business Administration’s Office of Advocacy, “the only way employers would have certainty [under the Final Rule] is by classifying their workers as employees requiring additional costs for benefits and wages.”

In addition to the Coalition litigation currently pending in the Fifth Circuit, four freelance workers filed suit against DOL in the U.S. District Court for the Northern District of Georgia on January 16, 2024. Plaintiffs allege violations of the Administrative Procedure Act and the United States Constitution and seek injunctive relief preventing the Final Rule from taking effect. According to the Complaint, Plaintiffs “seek[] to vindicate the right of individual entrepreneurs to remain independent in the face of a concerted effort to force them into employment relationships they neither want nor need.” Warren et al v. U.S. Dept. of Labor, No. 2:24-cv-00007-RWS (N.D. Ga. Jan. 16, 2024). Other groups, including the U.S. Chamber of Commerce, are also reportedly considering legal action to block the Final Rule.

Bottom Line

Employers who misclassify their workers as independent contractors may be liable for back wages, including unpaid overtime, as well as liquidated damages and attorneys’ fees, under the FLSA. This is true even if the workers were well paid and agreed to the classifications at the time. Independent contractor classification was already a challenging issue for employers before the issuance of the Final Rule, and it looks like things aren’t going to get any easier. Although it remains to be seen whether the Final Rule ultimately will be allowed to take effect, and if so, exactly what effects it would have, prudent employers should be mindful of these developments when classifying workers under the FLSA and take this opportunity to carefully evaluate existing worker classifications in consideration of the economic realities test.

Employers who have questions related to their worker classifications under the new final rule should contact an experienced employment attorney for advice.