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New Independent Contractor Rule Coming Soon!

By:Jeffrey K. Lewis, Esq., Program Coordinator, OSU Income Tax Schools & ANR Extension Friday, February 16th, 2024
Help wanted sign in front of corn field.

The U.S. Department of Labor (“DOL”) has introduced a new independent contractor rule, aiming to provide clarity and guidance for both employers and workers. The classification of workers as employees or independent contractors has become increasingly complex in recent years, resembling an endless carousel ride for many businesses, particularly those in the agricultural sector that frequently hire part-time and seasonal help. The DOL's new rule, published under the Fair Labor Standards Act of 1938 (“FLSA”), seeks to put an end to this perpetual uncertainty surrounding worker classification once and for all.

Background
The FLSA establishes federal standards for overtime pay, minimum wage, and child labor. Ohio law explicitly aligns its interpretation of the term "employee" with that of the FLSA for wage and hour purposes. For the FLSA to apply to an agricultural employer, an employment relationship must be established. This entails determining whether a worker is classified as an employee or an independent contractor.

However, the FLSA itself is silent on how to exactly distinguish an independent contractor from an employee. So, for years the DOL relied on the court system to develop the standard for determining whether a worker should be classified as an employee or an independent contractor. The court system developed an “economic realities test” to help determine whether an employment relationship exists with a worker. The economic realities test is a totality of the circumstances test – which means all factors should be weighed evenly – and relies on six factors. These factors are: 

  1. The nature and degree of control over the work; 
  2. The individual’s opportunity for profit or loss;
  3. The permanency of the work relationship;  
  4. Whether the work being performed is an integral part of the Employer’s business; 
  5. The worker’s investment in facilities and equipment; and 
  6. Skill and initiative. 

For decades courts and the DOL have applied these factors, or a similar variation of them, to help define employee and independent contractor under the FLSA. However, courts across the country have applied the factors inconsistently and have given certain factors different degrees of weight. 

2021 Independent Contractor Rule
In 2021, the DOL sought to resolve the inconsistent and subjective application of the factors by publishing a formal independent contractor rule (“2021 IC Rule”). This 2021 IC Rule marks the DOL’s first attempt to establish a standardized test for distinguishing between independent contractors and employees.  

The 2021 IC Rule used a variation of the economic realities test but gave greater weight to “two core factors” rather than applying each factor equally. The “two core factors” are: 

  1. The nature and degree of control over the work; and 
  2. The individual’s opportunity for profit or loss.

In the 2021 IC Rule, the DOL stated that the two core factors “are the most probative as to whether or not an individual is an economically dependent ‘employee’ . . . and each therefore typically carries greater weight in the analysis than any other factor.” The DOL also stated that if the two core factors “both point towards the same classification, whether employee or independent contractor, there is a substantial likelihood that is the individual’s accurate classification.” This is because, according to the DOL, the other factors are less probative and may not be probative at all and are “highly unlikely, either individually or collectively, to outweigh the combined probative value of the two core factors.” 

In other words, the DOL established a rule that looked at two core factors to determine the economic reality of the relationship between a worker and an employer. Thus, under the 2021 IC Rule, the economic realities test looked something like this: 

  1. Core Factors
    1. The nature and degree of control over the work; and
    2. The individual’s opportunity for profit or loss.
  2. Other Factors
    1. The permanency of the work relationship;  
    2. Whether the work being performed is an integral part of the Employer’s business; 
    3. The worker’s investment in facilities and equipment; 
    4. Skill and initiative; and
    5. Any additional factors 

New 2024 Rule
The carousel ride does not stop at the 2021 IC Rule, unfortunately. In January of 2024, the DOL published another rule, repealing the 2021 IC Rule and reverting back to a totality of the circumstances analysis of the economic realities test in which there are no core factors, and all factors are weighed evenly. The new rule, effective March 11, 2024, evaluates the following factors: 

  1. Opportunity for profit or loss depending on managerial skill; 
  2. Investments by the worker and the employer; 
  3. Degree of permanence of the work relationship; 
  4. Nature and degree of control; 
  5. Extent to which the work performed is an integral part of the employer’s business;
  6. Skill and initiative; and
  7. Any additional factors. 

Below is a more detailed analysis of the above seven factors. 

  1. Opportunity for profit or loss depending on managerial skill. This factor assesses whether a worker possesses managerial abilities that impact their capacity to generate profit or incur losses. Relevant considerations include: 
    1. Negotiating pay for services rendered 
    2. Having the freedom to accept or decline jobs 
    3. Choosing the order or time in which jobs are completed 
    4. Engaging in marketing, advertising, or other business expansion efforts
    5. Making decisions regarding hiring, purchasing materials and equipment, or renting space 

If a worker lacks the opportunity for profit or loss, they are likely an employee. 

  1. Investments by the worker and the employer. This factor examines whether a worker’s investments are capital or entrepreneurial in nature. Costs incurred by a worker to perform their job, like purchasing tools or equipment, are not indicative of entrepreneurial investment and suggest employee status. Conversely, investments supporting an independent business, such as expanding capabilities, reducing costs, or broadening market reach, suggest entrepreneurial investment and independent contractor status.  
  1. Degree of permanence of the work relationship. If the work relationship is indefinite in duration or continuous, the worker is probably an employee. If the work relationship is definite in duration, non-exclusive, project-based, or sporadic because the worker is in business for himself or herself and marketing his or her services or labor to multiple entities, then the worker is probably an independent contractor. 
  1. Nature and degree of control. This factor assesses the level of control the employer exercises over the work and economic aspects of the relationship. Greater control by the employer suggests and employee relationship, while more control by the worker indicates independent contractor status.  Factors include the employer setting the worker’s schedule, supervising work performance, limiting the worker’s ability to work for others, using technological means for supervision, reserving the right to supervise or discipline workers, determining who sets the prices or rates for services provided by the worker, and the marketing of the services or products that the worker provides. 
  1. Extent to which the work performed is an integral part of the employer’s business. This factor evaluates whether the work performed is essential to the employer's business operations. It focuses on the function performed rather than the individual worker. If the service provided is indispensable for the employer's functioning, it favors an employee classification. Conversely, if the work is not crucial to the employer's core business, it leans towards independent contractor status.
  1. Skill and initiative. The skill and initiative factor evaluates whether the worker utilizes specialized skills and demonstrates entrepreneurial initiative in their work. If the worker lacks specialized skills or relies on employer-provided training, it suggests employee status. Conversely, if the worker brings specialized skills and exhibits business-like initiative, they are likely an independent contractor. 
  1. Any Additional Factors. Additional factors may be relevant in determining the status of a worker. These additional factors may indicate whether the worker operates as an independent business entity or is economically reliant on the potential employer for work opportunities.

Under the new rule, no one factor is dispositive of determining whether a worker is an employee or independent contractor. For example, a landscaper may perform work that does not require specialized skills, but application of the other factors may demonstrate that the landscaper is an independent contractor (e.g. the landscaper may determine the price charged for the work, make decisions affecting opportunity for profit or loss, determine the extent of capital investment, work for many clients, and/or perform work for clients for which landscaping is not integral). 

What does it all mean? 
In announcing the new rule, the DOL said “[i]t is the Department’s obligation to administer and enforce the FLSA to ensure that workers who should be covered under the [FLSA] are properly classified as employees.” Many seem to suggest that this new rule is more employee friendly and makes it easier to classify a worker as an employee than the 2021 IC Rule.

The new rule, however, only affects a worker’s classification under the FLSA. The same standard does not apply to other federal laws, like the Internal Revenue Code. Nevertheless, those standards used in other federal laws may look eerily similar to the standard used here.  

Lastly, the carousel ride may not yet be over. There are already legal challenges to the new rule that might put the DOL’s hopes of ushering in a new period of clarity at risk (See Warren v U.S. Dep’t of Labor, 2:24-cv-00007, N.D. Ga.). 

Consequences of Misclassifying Workers. 
Misclassifying a worker can come with harsh consequences. An employer that misclassifies a worker may be required to pay unpaid wages owed to the employee, civil money penalties, and/or attorneys’ fees associated with litigation. Furthermore, employers may be held criminally and/or civilly liable under other federal and state statues for misclassifying a worker. It is vital that agricultural employers take classification of a worker seriously because all it takes is one disgruntled misclassified worker or workplace injury to a misclassified worker to seriously jeopardize an operation. 

Sources: 
Independent Contractor Status Under the Fair Labor Standard Act, 86 CFR 1168
Employee or Independent Contractor Classification Under the Fair Standards Act, 89 CFR 1638