Thought Leadership / News
March 5, 2024 
 Thought Leadership
Department of Labor Issues New Guidance on Independent Contractor Classification

Gray Reed Legal Alert

Early this year, we updated you about rule changes regarding independent contractor classifications from the federal Department of Labor (DOL). Specifically, the DOL has returned to a flexible “Economic Realities Test” (ERT) to determine contractor status. By way of reminder, that test focuses on:

  1. The worker’s opportunity for profit or loss depending on managerial skill;
  2. The investments by the worker and the business;
  3. The degree of the permanence of the work relationship;
  4. The nature and degree of the business’s control over the work;
  5. The extent to which the work performed is an integral part of the business’s operations; and
  6. The worker’s use of skill and initiative.

New Insights

The DOL recently offered additional insight into how it will implement the ERT. Specifically, DOL has now indicated:

  • As to the second factor – Investment:
    • The DOL will not analyze the investment factor solely in terms of the dollar value or size of the investments made by the business and worker, but rather will focus on the overall character of the investments made by each.
    • In doing so, the DOL will consider whether the employer and work are making qualitatively similar investments in the employment rather than conducting an inquiry into the amounts expended by the parties. For example, while a truck driver who buys and operates his or her own truck undoubtedly expended less money in furtherance of the relationship than a business that owns a fleet of trucks, however, the worker has invested in the relationship in a qualitatively similar way by taking steps to operate independently of the business and may be considered an independent contractor depending on the use of that truck in furtherance of independent business opportunities.
    • In this vein, the DOL has also confirmed that costs unilaterally imposed by the business on the worker—like requiring an employee to maintain a drivers’ license—are not, by themselves, indicative of a worker’s capital or entrepreneurial investment by the worker and are unlikely to support independent contractor status.
  • As to the fourth factor – Control:
    • Additionally, a business who is required by state, local, or other law or regulation to exert certain types of control over a worker will not be considered to make a worker more or less likely to be an employee under the test unless that control “goes beyond” what is necessary to comply with the relevant law or regulation.
    • For example, requiring a criminal background check to comply with Medicaid regulations would not be considered evidence of control, but requiring background checks every year where they are required only upon retention would be considered evidence of control.
  • As to the sixth factor – Skill and Initiative:
    • The DOL has clarified that the workers’ specialized skill alone is not determinative; rather the worker’s use of specialized skills in connection with a business-like initiative is indicative of independent contractor status.
    • For example, a highly-skilled mechanic who is told where to go and what services to perform would not be indicative of an independent contract relationship. However, a highly-skilled mechanic who travels to different worksites on his/her own initiative and determines what repairs to make while employing these skills to market and generate new business or obtain work from other companies would be indicative of an independent contractor relationship.
  • With regard to the ERT generally:
    • The DOL reiterated that “economic dependence” is the ultimate inquiry under the ERT, meaning that a worker is an independent contractor as opposed to an employee if the worker is, as a matter of economic reality, in business for themselves.

What Employers Need to Know

While the additional guidance included in the DOL’s latest announcement might assuage some of the public’s greatest concerns with the return to this ERT, businesses must remain vigilant. Even as narrowed by this guidance, the ERT will result in increased litigation for businesses—especially those utilizing individuals in gig, freelance or other independent contractor capacities. In order to limit these potential liabilities and best prepare for the newly complexified classification process, businesses should consider immediately taking the following steps to minimize liability:

  • Analyze your workforce:
    • Review your workers’ job descriptions and actual job duties to determine:
      • The extent of the workers’ independence and scope of the business’s control;
      • The type, quality and amount of contributions made by the business and the worker in furtherance of the business relationship;
      • The skills required and the way they are utilized by the worker;
      • The third parties the worker may or may not also be providing services for or seeking to provide services for;
      • The accuracy of the documentation reflecting the same.
    • Review your employment agreements and independent contractor agreements and consider how the ERT might be applied given their language—including any requirements regarding the appropriate devotion of time by the worker to the business; and
    • Review your job applications and advertisements to clarify specific aspects of the employment relationship should litigation later arise.
  • Review your policies, procedures and handbooks to ensure compliance with the ERT
    • Clarify worker authority, autonomy and agency to avoid any question of independence or control under the ERT; and
    • Ensure any worker classification policies conform with the ERT and correctly classify workers.
  • Conduct necessary trainings
    • Ensure that those in human resources and positions with hiring authority are trained on the new test and are up to date on best practices.
    • Ensure that managers and supervisors are aware of the contours of the ERT such that they can potentially identify necessary changes in the employment relationship and avoid violations of the ERT.
  • Employers should enlist the help of experienced labor and employment counsel in conducting the reviews and changes identified above to avoid potential liability.