The Department of Labor announced a final rule for determining independent contractor status under the Fair Labor Standard Act in early January. The rule, which rescinds the 2021 Independent Contractor Rule, will not impact tests by the IRS or other federal agencies.
According to the Department of Labor, the rule seeks to combat employee misclassification, which impacts workers’ rights to pay, “facilitates wage theft, allows some employers to undercut their law-abiding competition, and hurts the economy at large.”
The Associated Builders and Contractors (ABC) released a statement in opposition to the final rule, saying it creates “ambiguous” and “difficult-to-interpret” standards for determining independent contractor status.
“Under the rule’s multifactor test, employers will now be forced to guess which factors should be given the greatest weight in making the determination,” said Ben Brubeck, vice president of regulatory, labor, and state affairs for the ABC. “Instead of promoting much-needed economic growth and protecting legitimate independent contractors, the final rule will result in more confusion and expensive, time-consuming, unnecessary, and often frivolous litigation, as both employers and workers will not understand who qualifies as an independent contractor.”
The previous rule focused on two of five factors used to determine worker status; the current final rule restores a “totality-of-the-circumstances” analysis, with six non-weighted factors to consider when determining whether a worker is an employee or an independent contractor.
The six factors include:
- Is the work performed an integral part of the employer’s business?
- Does the worker’s managerial skill affect the worker’s opportunity for profit or less?
- Is the relationship between the worker and employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
- Does the worker use specialized skills to perform the work, and do those skills contribute to business-like initiative?
- Are investments by a worker capital or entrepreneurial in nature?
The NAHB opposed the rule when it was first proposed in 2022, noting that the policy “threatens to impact many industries that rely on the subcontractor business model, including residential construction.”
“Not only does the proposed rule ignore the realities of how businesses and independent contractors work together in 21st century America, but, in so doing, it ignores the preference many workers have to remain independent contractors,” a group of 200 organizations, including the NAHB, ABC, and Associated General Contractors of America, said in a comment letter opposing the proposed rule in 2022.
The Department of Labor will also consider additional factors that may be relevant to determining whether a worker is an employee or independent contractor.
“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” acting secretary of labor Julie Su said in an announcement of the final rule. “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.”
ABC and other industry organizations supported the 2021 final rule, which they said simplified and clarified factors for consideration.
“The confusion and uncertainty resulting from the final rule will cause workers who have long been properly classified as independent contractors in the construction industry to lose opportunities to work,” Brubeck said.
The changes in this final rule will go into effect March 11.
