U.S. Department of Labor sets final rule on worker misclassification

Acting DOL Secretary of Labor Julie Su

The U.S. Department of Labor announced a long-awaited final rule regarding the misclassification of workers.

On Jan. 9, the DOL officially stated it would rescind an independent contractor rule put in place during the Trump Administration.

Among the industries the rule is expected to affect are construction, healthcare, trucking and housekeeping.

The new final rule will help employers and workers better understand when a worker must be considered an employee and when they qualify as an independent contractor under the Fair Labor Standards Act.

It provides guidance on proper classification and seeks to combat employee misclassification, which the DOL called a serious problem.

Oftentimes, unscrupulous employers take advantage of their workers – especially immigrants and members of the underserved communities – and illegally misclassify them in order to save money.

According to the Economic Policy Institute, while misclassification can happen to any worker, it is more likely to occur in occupations such as construction, landscaping workers, home health care aides, housekeeping cleaners or nail salon workers.

When employees are misclassified as independent contractors, they lose the legal right to earn at least the minimum wage and to be paid time-and-a-half for overtime hours. Misclassified workers cannot receive unemployment or qualify for Workers’ Compensation if they are injured on the job. Furthermore, they are not eligible for the protections in the National Labor Relations Act and must assume the full cost of all taxes – including Social Security and Medicare.

By misclassifying workers, these employers undercut their law-abiding competition, which can skew bids or proposals.

“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” said Acting DOL Secretary of Labor Julie Su in a prepared statement. “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.”

According to the DOL website, the guidance provided by the final rule aligns with longstanding judicial precedent on which employers have previously relied to determine a worker’s status as either an employee or independent contractor. The new rule will preserve essential worker rights and provide consistency for entities covered by the Fair Labor Standards Act.

The new “independent contractor” rule restores the multi-factor analysis used by courts for decades, to ensure all relevant factors are analyzed to determine whether a worker is an employee or an independent contractor.

The rule addresses six factors that guide the analysis of a worker’s relationship with an employer.

The first factor is the opportunity for profit or loss and weighs toward the individual being an employee to the extent the individual is unable to affect his or her earnings or is only able to do so by working more hours or faster.

Investments by the worker and the employer are the second factor. It will treat investment as a standalone factor in the economic reality analysis instead of considering investment within the opportunity for profit or loss factor. Furthermore, costs borne by the worker simply to perform their job, such as purchasing tools and equipment, are not evidence of capital or entrepreneurial investment.

The third factor is the degree of permanence of the work relationship. The DOL believes an exclusivity requirement imposed by the employer is a strong indicator of control, as discussed under the control factor.

Nature and degree of control is the fourth factor. Issues related to scheduling, supervision over the performance of the work (including the ability to assign work) and the worker's ability to work for others are relevant considerations when determining if a worker is an independent contractor.

The fifth factor is the extent to which the work performed is essential to the employer's business. It considers whether the work is critical, necessary or central to the employer's business and better reflects the economic reality of case law. It is more consistent with the totality-of-the-circumstances approach to determining whether a worker is an employee or an independent contractor.

For decades, the courts have repeatedly found a worker's performance of work that is integral to the employer's business to be an indicator of employee status.

The final factor is skill and initiative. This factor considers whether a worker uses specialized skills to perform the work and whether those skills contribute to a business-like initiative that is consistent with the worker being in business for themself instead of being economically dependent on the employer.

The final rule provides detailed guidance regarding the application of each of these six factors. No factor or set of factors among this list of six has a predetermined weight, and additional factors may be relevant.

The rule separately rescinds the 2021 Independent Contractor Rule, which the DOL believes is not consistent with the law and longstanding judicial precedent.

The final rule takes effect on March 11.