New Rule Will Reclassify Independent Contractors as Employees

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A new U.S. Department of Labor rule announced Jan. 9 adopts a multistep “economic factors” test for companies to follow to determine whether a worker should be classified as an independent contractor or an employee, adding a layer of regulatory oversight that transportation stakeholders fear will upend the business model for independent truck drivers.

“The trucking industry has used independent contractors since the inception of interstate trucking, and court decisions over the last 90 years have continually reaffirmed the legitimate role ICs play in the economy,” American Trucking Associations President Chris Spear said in a statement. “It’s unfortunate that the administration has chosen to replace a clear and straightforward standard with a tangled mess that weakens our supply chain and undermines the livelihoods of hundreds of thousands of truckers across the country.”

The rule, set to take effect March 11, directs employers to consider six criteria for determining whether a worker is an employee or a contractor, without predetermining whether one outweighs the other. The new regulation was formally published in the Federal Register on Jan.10.

In adopting the new rule, the Labor Department said it is rescinding a 2021 rule and modifying Wage and Hour Division regulations that it maintains are “more consistent with judicial precedent” under the Fair Labor Standards Act.

“After careful consideration, the department decided it was appropriate to move forward with a proposed rescission of the 2021 independent contractor rule and a replacement regulation,” the announcement said. “As explained in the [Notice of Proposed Rulemaking], the department believed that retaining the 2021 IC Rule would have a confusing and disruptive effect on workers and businesses alike due to its departure from case law describing and applying the multifactor economic reality test as a totality-of-the-circumstances test.”

The department said the final rule provides guidance on how six economic reality factors should be considered. They 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, and skill and initiative.

“Just as under the 2021 IC Rule, and in accordance with long-standing precedent and guidance, additional factors may also be considered if they are relevant to the overall question of economic dependence,” the final rule said.

Opposition from the business community is expected. One of the groups threatening a lawsuit is the U.S. Chamber of Commerce.

“We anticipate business groups will file suit(s) challenging DOL’s authority to issue this regulation,” said a Jan. 9 statement by the Indianapolis-based transportation law firm of Scopelitis, Garvin, Light, Hanson and Feary.

This rule denies independent contractors the freedom of choice, weakens our supply chain and undermines the livelihoods of hundreds of thousands of truckers.

It's exactly why we opposed Julie Su's nomination before and why we'll continue to oppose it now. https://t.co/3PIasdJA1L — American Trucking (@TRUCKINGdotORG) January 9, 2024

Scopelitis said a few “troubling aspects” of the earlier proposed rule remained largely unchanged, including:

• On the control factor, a contractual right to control or supervise will be considered indicative of employee status, even if in practice that right is never exercised by the putative employer.
• On the degree of permanence of the work relationship factor, exclusivity of a working relationship is considered indicative of employee status under this factor as well as under the control factor.

“As compared to the initial proposed rule, there were some incrementally positive changes in response to comments filed by commenters, including comments filed by Scopelitis, though not enough to make the final rule favorable on balance,” the law firm said.

But the Labor Department said that instead of using the “core factors” set forth in the 2021 contractor rule, the final rule returns to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.

The agency said the final rule also provides broader discussion of how scheduling, remote supervision, price setting and the ability to work for others should be considered under the control factor, and it allows for consideration of reserved rights while removing the provision in the 2021 IC Rule that minimized the relevance of retained rights.

“Further, the final rule discusses exclusivity in the context of the permanency factor, and initiative in the context of the skill factor,” DOL said.

The initial deadline for interested parties to submit comments on the NPRM was Nov. 28, 2022. The department received approximately 55,400 comments on the NPRM.

“As a general matter, most employees, labor unions, worker advocacy groups and other affiliated stakeholders generally expressed support for the NPRM,” the agency said.

“By contrast, most commenters who identified as independent contractors, business entities and commenters affiliated with those constituencies generally expressed opposition to the NPRM, criticizing the department’s proposed economic reality test as ambiguous and biased against independent contracting.” .