Labor Department Finalizes Changes to Independent Contractor Test

The U.S. Department of Labor (DOL) on Wednesday published a final rule changing its policy for determining independent contractor status under the Fair Labor Standard Act. Importantly, this test will not impact tests by the IRS or other federal agencies.

Unlike the current policy, which was issued under the previous administration and focuses on two of the five factors used to determine worker status, this final rule restores a “totality-of-the-circumstances” analysis, setting forth six non-weighted factors to consider when determining whether a worker is an employee or an independent contractor.

The test’s ultimate inquiry is whether, as a matter of economic reality, the worker is economically dependent on the employer (and thus an employee) or in business for themselves (and thus an independent contractor).

The six factors to consider under the test:

1. Is the work performed an integral part of the employer’s business?
2. Does the worker’s managerial skill affect the worker’s opportunity for profit or less?
3. Is the relationship between the worker and employer permanent or indefinite?
4. What is the nature and degree of the employer’s control?
5. Does the worker use specialized skills to perform the work, and do those skills contribute to business-like initiative?
6. Are investments by a worker capital or entrepreneurial in nature?

According to the rule, DOL will also consider additional factors that “may be relevant in determining whether the worker is an employee or independent contractor” to be considered in the question of worker status, but DOL did not provide examples of what those factors could be.

The changes in this final rule will go into effect on March 11, 2024.

NAHB filed comments when these changes were first proposed in 2022, noting that the new policy threatens to impact many industries that rely on the subcontractor business model, including residential construction. NAHB will continue to provide updates on forthcoming actions with the rulemaking.