On March 11, 2024, the Department of Labor’s (DOL) Wage and Hour Division’s (WHD) final rule for determining whether a worker is an employee or independent contractor became effective. The final rule rescinds DOL’s 2021 regulation that was published at the end of the Trump administration and establishes a new test to determine worker classification.

The implications of this shift are substantial for employers, as the misclassification of employees as independent contractors carries significant liability under the Fair Labor Standards Act (FLSA). Penalties could include paying owed wages and overtime pay, liquidated damages and attorneys’ fees and costs. Employers in tree care who rely on contract climbers, trainers and CDL truck drivers must carefully consider the impact of this rulemaking.

Background

The FLSA requires employers to meet wage, hour and recordkeeping requirements for their employees but not for independent contractors. Since the 1940s, the DOL and the courts have applied what is known as an “economic reality test” to determine if a worker is an employee or an independent contractor.

This test uses six factors to analyze the worker’s relationship with the potential employer. The analysis is based on a “totality-of-the-circumstances,” meaning all factors are considered and no single factor weighs more heavily than the others. The subjective nature of this approach has led to inconsistent and unpredictable court applications.

In 2021, the Trump administration attempted to address this confusion by issuing the first rule providing comprehensive guidance on independent status under the FLSA (Trump Rule). The Trump Rule prioritized two factors: the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative, investment or both.

In contrast, the new final rule, which replaced the Trump Rule on March 11, reverts back to a totality-of-the-circumstances test.

The Biden administration DOL asserts its independent contractor rule will protect workers against misclassification and the resulting loss of benefits and protections provided under federal wage-and-hour laws. Opponents of the rule assert it will increase uncertainty for employers and raise the potential for costly and time-consuming litigation

The rule’s six factors for determining worker classification

Opportunity for profit or loss depending on managerial skill: This factor assesses whether a worker’s financial success is influenced by their own business decisions, such as negotiating pay, selecting jobs or marketing their services, rather than merely working more hours at a fixed rate. It underscores the distinction between independent contractors, who can navigate profit and loss through their managerial skills, and employees, whose earnings are typically not dependent on such skills.

Investments by the worker and the potential employer: This factor examines whether a worker’s
investments are capital or entrepreneurial, indicating independent-contractor status if they support an independent business function. Even smaller-scale investments by the worker similar to those of the employer can suggest independent operations. Costs imposed by the employer or necessary expenses to perform a job, however, do not qualify as entrepreneurial investments indicative of independent-contractor status.

Degree of permanence of the work relationship: This factor evaluates the expected duration and exclusivity of the worker’s relationship with the employer. A more permanent or exclusive relationship suggests employee status, whereas a definite, non-exclusive or project-based relationship indicates independent-contractor status. This factor emphasizes the importance of the worker’s independent business initiative in determining their classification, noting that long-term relationships do not automatically imply employee status if the worker maintains significant control over their work and operates their own business.

Nature and degree of control: This factor assesses the potential employer’s control, including reserved control, over the work and economic aspects of the relationship. It looks at whether the employer determines schedules, supervises work, restricts working for others, uses technology for oversight or controls service pricing and marketing. Actions taken by the employer to comply with federal, state, tribal or local laws do not indicate control. However, the rule specifies that actions that “go beyond compliance with a specific, applicable … law or regulation” and “instead serve the potential employer’s own compliance methods, safety, quality control or contractual or customer-service standards may be indicative of control.”

Extent to which the work performed is an integral part of the employer’s business: This factor evaluates whether the worker’s tasks are essential to the main operations of the business. If the business relies heavily on these services for its functioning, it points toward an employment relationship due to economic dependence on the employer. However, DOL recognizes that some integral services, such as accounting, may not determine employment.

Skill and initiative: This factor examines whether a worker’s specialized skills are utilized with a business-oriented approach. Simply having specialized skills does not imply independent-contractor status; it’s the entrepreneurial application of these skills – for instance, to expand their business – that differentiates an independent contractor from an employee.

Application to the tree care industry

Given that the independent-contractor rule narrows who qualifies as an independent contractor under the FLSA, tree care companies utilizing contract climbers in their operations may face new challenges.

As noted in an earlier article, “Change Looming for Who Qualifies as an Employee vs. Independent Contractor” (TCI Magazine, December 2022), the tree care industry has become increasingly reliant on contract climbers. The companies that engage these contractors often do so for complex, large jobs that require a contract arborist’s reputation, skill and/or expertise.

Thus, contract climbers allow tree care companies to scale their resources and meet client demands immediately while the company’s workforce expands. Additionally, the special knowledge and skills contract climbers typically have provide valuable training to employees through on-the-job exposure to advanced techniques.

Learn more

As implementation of the independent-contractor rule begins, it’s crucial to understand that, while the changes under the Biden administration are significant, the rule is interpretive rather than substantive. This means courts may, but are not required to, defer to the legal interpretations within the rule. Courts have the discretion to adopt the rule in its entirety, adopt portions of it or ignore it altogether.

Given this variability in potential legal application, we advise companies to closely review their contractor engagements, ensuring alignment with the FLSA as interpretations evolve.

For a more in-depth explanation of the six factors, we recommend consulting the detailed memo available on Tcimag.tcia.org/Resources/Dol Final IC Rule 2024.

Josh Leonard is a legislative assistant with Ulman Public Policy, TCIA’s Washington, D.C.-based advocacy and lobbying partner.