We are writing to bring to your attention a recent development from the U.S. Department of Labor (DOL) that may affect how your business classifies the people who work for you — specifically, the distinction between employees and independent contractors.

What Happened?

On Feb. 27, 2024, the DOL took the first steps in rescinding the Biden administration’s 2024 independent contractor rules, a move that will potentially make it easier for workers to qualify as independent contractors.

The DOL has announced a proposed rule that aims to make it easier for workers and businesses to understand when someone should be treated as an employee versus an independent contractor under federal wage and hour laws, including the Fair Labor Standards Act (FLSA). The proposed rule would also extend the same analysis to the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act.

As part of this proposal, the DOL would rescind a 2024 rule from the prior administration and replace it with a more streamlined approach similar to one the department used in 2021.

Why Does This Matter?

Getting worker classification right is important. If someone is an employee, they are entitled to protections under federal law — such as minimum wage, overtime pay and family and medical leave. Independent contractors, on the other hand, generally do not receive those same protections. Misclassifying a worker can lead to significant legal liability, back pay obligations and penalties. The DOL has stated that this proposed rule is intended to improve compliance, reduce misclassification and reduce costly litigation.

What Would the Proposed Rule Do?

In plain terms, the proposed rule would use what is called an “economic reality” test. Rather than simply looking at what a contract says about a worker’s status, the DOL would look at the real-world nature of the working relationship. The central question would be whether a worker is truly in business for themselves or whether the worker is economically dependent on the company for work.

To answer that question, the rule identifies two main factors. The first is the nature and degree of control the company has over the work — for example, does the company set the worker’s schedule, dictate how the work is done or supervise the details of performance? The second is the worker’s opportunity for profit or loss based on their own initiative or investment — in other words, does the worker have a genuine ability to earn more (or lose money) depending on how they manage their own work and resources?

In addition to those two main factors, the proposed rule would also consider other aspects of the relationship, including how much skill the work requires, how permanent the working arrangement is, and whether the worker’s role is part of a company’s core operations. Importantly, the rule emphasizes that the actual day-to-day practice matters more than what a written contract might say.

The DOL has also included eight real-world examples in the proposed rule to help illustrate how the factors would be applied in practice.

What Should You Do Now?

The proposed rule is not yet final. There is a 60-day public comment period that closes at 11:59 p.m. ET on April 28. This means the rule could still change before it takes effect.

In the meantime, we recommend taking the following steps:

• Review how your business currently classifies workers as employees or independent contractors.
• Consider whether any of your current independent contractor relationships might be at risk of reclassification under the factors described above.
• Evaluate whether you wish to submit a comment to the DOL during the comment period, particularly if the proposed rule would significantly affect your operations.

Partners Alana Ackels and Jay Wallace are happy to assist with any of these steps. Please do not hesitate to reach out with questions.