The U.S. Department of Labor (DOL) on Jan. 9 announced a final rule on how it classifies workers as employees or independent contractors under the Fair Labor Standards Act (FLSA). It’s the latest in the DOL’s effort to crack down on companies that misclassify their employees to avoid providing certain protections and benefits, like worker’s comp and overtime pay. While the term “independent contractor” may bring to mind “gig” work like Uber and Lyft, the rule could also impact other industries, including construction. Some industry associations argue the rule could end up hurting legitimate businesses in the trades, including HVAC, where there are already too few workers to go around.

DOL’s Stance

The final rule rescinds the 2021 Independent Contractor Rule, which the DOL believes is not consistent with the law and longstanding judicial precedent. Instead, it aligns with an analysis used by courts for decades, addressing six factors that guide the analysis of a worker’s relationship with an employer.

“The Department believes that this final rule will reduce the risk that employees are misclassified as independent contractors, while at the same time providing greater consistency for businesses that engage (or wish to engage) with individuals who are in business for themselves,” DOL stated in the FAQ section of the rulemaking announcement.

According to a DOL press release, the new rule will preserve essential worker rights and provide consistency for entities covered under the Fair Labor Standards Act; it “seeks to combat employee misclassification, a serious problem that impacts workers’ rights to minimum wage and overtime pay, facilitates wage theft, allows some employers to undercut their law-abiding competition and hurts the economy at-large,” according to the statement.

“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” stated Acting Secretary of Labor Julie Su. “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.”

“Confusion,” “Chaos”

The Associated Builders and Contractors (ABC) supported the 2021 Independent Contractor Rule, which they believe simplified and clarified factors for determining when a worker is an independent contractor versus an employee under the FLSA.

“Regrettably, 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 for work,” said Ben Brubeck, ABC’s vice president of regulatory, labor, and state affairs, who criticized the final rule that was passed over his group’s opposition. “Legitimate independent contractors are a vital part of the construction industry, providing specialized skills, entrepreneurial opportunities, and stability during fluctuations of work common to the industry. They play an important role for large and small contractors, delivering construction projects safely, on time, and on budget for their government and private customers. This move will jeopardize the ability of construction firms to continue the industry’s longstanding practice of utilizing legitimate independent contractors.”

In March 2021, ABC, its Southeast Texas chapter, and the Coalition for Workforce Innovation filed suit against the DOL, which remains pending. In March 2022, the U.S. District Court for the Eastern District of Texas dealt a blow to the Biden administration’s efforts to delay and rescind the 2021 independent contractor final rule in that case. Under a decision applauded by ABC, the ABC-supported rule went into effect as scheduled on March 8, 2021.

In October 2022, the DOL announced a new proposed rule to rescind and replace the 2021 final rule, and ABC submitted comments in opposition on Dec. 13, 2022.

The 6 Factors

Under the final rule, an analysis of the following six factors determines whether a worker is an employee or independent contractor:

1. Any opportunity for profit or loss a worker might have,
2. The financial stake and nature of any resources a worker has invested in the work,
3. The degree of permanence of the work relationship,
4. The degree of control an employer has over the person’s work,
5. Whether the work the person does is essential to the employer’s business, and
6. The worker’s skill and initiative.

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 if such factors in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work (i.e., an employee under the FLSA).

“This final rule continues to affirm that a worker is not an independent contractor if they are, as a matter of economic reality, economically dependent on an employer for work,” explains the DOL in its FAQs.

ABC’s Brubeck, however, said the six-factor analysis “creates an ambiguous and difficult-to-interpret standard.”

“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,” he said. “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.”

What’s Different Now?

The final rule, which takes effect on March 11, 2024, has several similarities to the 2021 Independent Contractor Rule. For example, both rules advise that independent contractors are workers who, as a matter of economic reality, are in business for themselves, whereas FLSA-covered employees are workers who are, as a matter of economic reality, economically dependent on the employer for work. Both rules identify economic dependence as the “ultimate inquiry” of the analysis; both rules provide a non-exhaustive list of factors to assess economic dependence; and both rules caution that no single factor is determinative. Both rules also clarify that economic dependence does not focus on the amount of income the worker earns, or whether the worker has other sources of income.

However, this final rule differs from the guidance provided in the 2021 Independent Contractor Rule in several important ways. Specifically, consistent with the approach taken by federal courts, this final rule:

• Returns to a totality-of-the-circumstances economic reality test, where no single factor or group of factors is assigned any predetermined weight;
• Considers six factors (instead of five), including the investments made by the worker and the potential employer;
• Provides additional analysis of the control factor, including a detailed discussion of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the nature and degree of control over a worker;
• Returns to the Department’s longstanding consideration of whether the work is integral to the employer’s business (rather than whether it is exclusively part of an “integrated unit of production”);
• Provides additional context to some factors, including a discussion of exclusivity in the context of the permanency factor and initiative in the context of the skill factor; and
• Omits a provision from the 2021 Independent Contractor Rule that minimized the relevance of an employer’s reserved but unexercised rights to control a worker.

Q&A for HVAC Contractors

An HVAC contractor reading those six factors might come away wondering: “What about investments my technicians make in purchasing their tools?” “What about workers I hire for the shoulder season?”

And what is that section about “skill and initiative”?

Here’s what the rule’s FAQ section has to say.

How does the final rule explain “investments by the worker and the employer?”

This factor considers whether any investments by a worker are capital or entrepreneurial in nature. Costs to a worker of tools and equipment to perform a specific job, costs of workers’ labor, and costs that the potential employer imposes unilaterally on the worker, for example, are not evidence of capital or entrepreneurial investment and indicate employee status. Investments that are capital or entrepreneurial in nature and thus indicate independent contractor status generally support an independent business and serve a business-like function, such as increasing the worker's ability to do different types of or more work, reducing costs, or extending market reach. Additionally, the worker's investments should be considered on a relative basis with the potential employer's investments in its overall business. The worker’s investments do not have to be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of investments or the sizes of the worker and the potential employer. Instead, the focus should be on comparing the investments to determine whether the worker is making similar types of investments as the potential employer (even if on a smaller scale) to suggest that the worker is operating independently, which would indicate independent contractor status.

How does the final rule explain the “degree of permanence of the work relationship?”

This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers. This factor weighs in favor of the worker being an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities. This may include regularly occurring fixed periods of work, although the seasonal or temporary nature of work by itself would not necessarily indicate independent contractor classification. Where a lack of permanence is due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ, this factor is not necessarily indicative of independent contractor status unless the worker is exercising their own independent business initiative.

How does the final rule explain “skill and initiative?”

This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work. Where the worker brings specialized skills to the work relationship, this fact is not itself indicative of independent contractor status because both employees and independent contractors may be skilled workers. It is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.

To read the full FAQ section, visit www.dol.gov/agencies/whd/flsa/misclassification/rulemaking/faqs.