The U.S. Department of Labor (DOL) released its new final rule defining independent contractors under the Fair Labor Standards Act (FLSA). Set to go into effect March 11, 2024, it’s not the groundbreaking overhaul some were hoping for, but it does bring a handful of improvements over the current standards. While not a leap forward for independent contractors, when we stack it up against the proposed 2022 version, we find some silver linings that offer a bit more flexibility.
Let’s dive into what this means for you and how Openforce can help navigate these changes.
DOL sticks with the Economic Realities test, not the ABC test
The good news is that the DOL did not adopt the ABC test. Instead, they stayed with the Economic Realities test. The Economic Realities test, shaped by various court decisions, aims to assess whether workers have economic independence and the autonomy to make a profit or risk a loss.
After decades of relative stability in the law, the DOL during the Obama administration, the Trump administration, and now the Biden administration has reinterpreted the Economic Realities test three times. This latest interpretation throws out the Trump-era version of the Economic Realities test that focused on two factors and reintroduces a 6-factor version of the Economic Realities test.
Key factors of the DOL’s independent contractor rule
The DOL’s 6-factor version of the Economic Realities test will now be:
- Does the contractor have an opportunity for profit and loss based on their managerial or entrepreneurial skill (and not just based on working more hours or accepting more loads)? Do they have the ability to add customers, add personnel, and negotiate revenue or costs?
- Did the contractor make meaningful investments in their business that show they are in business for themselves (e.g., did they invest in equipment, laptops, cameras, drivers, helpers, accounting/tax support, insurance, marketing/sales, etc.)?
- How permanent is the working relationship between the contractor and the contracting company? Is it evergreen? Does it have a clear start and stop date/completion mark? Can they work with other customers during the relationship?
- Was the contractor free from control? Did they have the right, and did they, in fact, make the decisions that impacted their ability to earn a profit or suffer a loss? Did they control their personnel? Did they control how they completed work? Were they managed, tracked, or recorded?
- Was the contractor’s work integral to your work? This is close to the ‘B’ factor in the ABC test. Are you and the contractor in the same business? Or is your business purpose and function different and separate from theirs? Can you show the contractor’s business specializes in equipment, transportation, and delivery services? Can you show your business specializes in customer service, shipment/work order management, compliance, and so on?
- How much skill and business initiative did the contractor have and use in their business? What evidence shows the contractor had business initiative? Did they add multiple helpers? Did they make excellent cost management decisions to earn more profit? Did they sign up with multiple customers to get more opportunities?
- It’s not an official 7th factor, but the final rule does state the agency will consider anything else they believe shows the contractor was an employee or an independent contractor.
We expected the final rule to be nearly identical to the proposed rule from the fall of ’22, and to be worse than the Trump-era rule.
And it is.
But in a few ways, the final rule is better than the proposed rule for independent contractors and the companies utilizing them. While we are not saying the final rule is good, we are saying it is slightly better than the proposed rule.
Small improvements over the proposed rule
In the final rule itself and the rule’s commentary, the DOL recognized:
- Independent contractors are important in the economy, and many people want to be independent.
- Investing in a vehicle, even through you, can prove the contractor has invested in their business.
- Exercising control just enough to ensure compliance with laws and regulations is not evidence of control for employment status purposes (but exercising more control than necessary for legal compliance would be evidence of control)
- The independent contractor’s investment in their business does not need to be close in total dollars to your investment in your business (e.g., if you invested $10,000,000 in trailers, they don’t have to invest $8,000,000 in equipment to be considered independent), but the independent contractor does need to make similar types of investments in their business (e.g., investments in equipment, marketing, people, technology, etc.).
- A truck driver’s use of their CDL driving skills in pursuit of a trucking business is evidence of “skill and initiative” under the factors.
This new rule does not rewrite independent contractor rules across the country, and it does not eliminate the ability for workers to choose independence entirely. It will only apply to claims overseen by the DOL. This has no impact on workers’ compensation claims, unemployment claims, motor vehicle accident claims, IRS issues, or many state claims. This applies to claims brought by independent contractors or the DOL itself alleging the independent contractor was improperly classified as an independent contractor and not paid minimum wage, not paid overtime, and other protections under the Fair Labor Standards Act.
The DOL has taken a strong stance against independent contractors for a long time. This final rule is the DOL reiterating that stance but not dramatically changing it.
Navigating the DOL’s final rule
Openforce is acutely aware of the intricacies involved in meeting the Department of Labor’s criteria for independent contractor status. Our suite of technology and services is meticulously designed to ensure that independent contractors can affirm their status by demonstrating the independence required by the new final rule:
- Business Promotion: Openforce’s Delivery Driver Network enables independent contractors to effectively advertise their services, showcasing their autonomy and business acumen.
- Diverse Clientele: Our independent contractor management and payment platforms support independent contractors in maintaining a broad client base, illustrating their ability to work with multiple clients, which is a key determinant in establishing independent contractor status.
- Insurance Autonomy: Through our digital enrollment workflows, contractors are empowered to procure critical insurance and make informed decisions regarding their coverage, further reinforcing their independence.
- Personnel Management: Independent contractors have the ability to hire and fire personnel directly within their Openforce portal, an essential function of a truly independent business entity.
- Legal Entity Utilization: The use of legal entities is facilitated within Openforce’s technology platform, allowing independent contractors to operate under their business structures, which is a significant factor in differentiating them from employees.
- Access to Business Resources: Openforce’s Small Business Marketplace provides independent contractors with access to business resources and tools that are vital for running and growing their independent operations.
- Vehicle Ownership: The ability for contractors to secure their own vehicles through Openforce’s partnerships with Fluid Truck and Ryder is an investment indicative of an independent business and an essential aspect of the contractor’s ability to control their work environment and conditions.
By partnering with Openforce, companies can confidently navigate the intricacies of the DOL’s final rule. Our services are designed to not only protect the business freedom of independent contractors but also to provide companies with the evidence needed to support their contractor’s independent status, thereby minimizing the risk of misclassification.
Takeaways from the final rule
Regardless of the test, the best way to win a misclassification claim is to prevent one from starting. Refresh your agreements regularly, educate your workforce on how to respect independent contractors’ business freedoms, and utilize available technologies like Openforce to help prove your independent contractor workers are independent.
Now is the time to review every facet of your independent contractor program. Does your paperwork, interactions with the contractor, policies, practices, and processes all reinforce the freedom of the contractor to make business decisions and be a small business owner?
Can you prove it?
If not, contact us today to ensure your independent contractor program is robust, compliant, and audit-ready.