Labor Department finalizes revamped worker classification rule

The U.S. Department of Labor released a final rule Tuesday on classifying workers as either employees or independent contractors, reversing a change from the Trump administration.

The rule aims to help employers and workers better understand when a worker qualifies as an employee and when they may be considered an independent contractor under the Fair Labor Standards Act. It can also be important when determining how a worker should be treated for tax purposes.

The rule offers guidance on classification in an effort to combat employee misclassification, which can have an impact on worker rights, minimum wage and overtime pay, and wage theft. 

"Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections," said Acting Secretary of Labor Julie Su in a statement. "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." 

Andrew Harrer/Bloomberg

The Labor Department said the guidance under the final rule will align with longstanding judicial precedent on which employers have historically relied to determine a worker's status as either an employee or independent contractor. It rescinds a 2021 Independent Contractor Rule from the Trump administration that the Labor Department under the Biden administration believes is not consistent with the law and longstanding judicial precedent. It aims to preserve essential worker rights and offer consistency for entities covered by the Fair Labor Standards Act. 

The new "independent contractor" rule restores the multifactor analysis used by courts for decades, so all relevant factors are analyzed to determine whether a worker is an employee or an independent contractor. The rule addresses six factors that guide the analysis of a worker's relationship with an employer, including any opportunity for profit or loss a worker might have; the financial stake and nature of any resources a worker has invested in the work; the degree of permanence of the work relationship; the degree of control an employer has over the person's work; whether the work the person does is essential to the employer's business; and a factor regarding the worker's skill and initiative.

In developing the new rule, the department said its Wage and Hour Division considered feedback provided by stakeholders at forums in the summer of 2022 and during the comment period after the proposal's announcement in October 2022. The final rule takes effect on March 11, 2024.

The Economic Policy Institute, a nonprofit think tank based in Washington, D.C., welcomed the final rule. An analysis by the group last year found that in 11 commonly misclassified occupations, workers misclassified as independent contractors lose out on thousands of dollars in earnings and benefits per year, compared with workers doing the same job with employee status.