The U.S. Department of Labor has issued a final rule revising the Department’s guidance on how to determine who is an employee or independent contractor under the Fair Labor Standards Act, which requires employers to pay their workers a minimum hourly wage and a premium rate for overtime. The new rule, which takes effect on March 11, replaces and rescinds an earlier one determined January 2021 that made it easier for employers to classify workers as independent contractors—and, as such, not provide them with the same benefits employees receive.
According to the DOL’s website, the rule provides guidance on proper classification and seeks to prevent misclassification, which it calls “a serious problem that impacts workers’ rights to minimum wage and overtime pay, facilitates wage theft, allows some employers to undercut their law-abiding competition and hurts the economy at-large.”
“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” Acting Secretary of Labor Julie Su said 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.”
The new “independent contractor” rule restores previous multifactor analysis and is meant to ensure that “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: 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. This is down from five factors in the 2021 ruling, which identified the nature and degree of control over the work and the worker's opportunity for profit or loss to be the two “core factors” that would determine a worker’s role as employee or independent contractor.
According to the DOL, the guidance provided by the final rule “aligns with longstanding judicial precedent on which employers have previously relied to determine a worker’s status as either an employee or independent contractor.”
Speaking to the Washington Post, Su said the rule will “help create a level playing field for businesses, protect workers from being denied the right to fair pay and affirm the vital role true independent contractors play in our economy by allowing them to thrive.”
AHLA Responds
The American Hotel & Lodging Association responded quickly to the announcement, arguing that the regulation “vastly complicates” the process for classifying independent contractors and will create “costly new uncertainties.”
“We are extraordinarily disappointed that the Labor Department dismissed the concerns of the thousands of small business owners AHLA represents and is insisting on making it harder for hotels to maintain operations in what is already one of the toughest labor markets in recent history,” AHLA President & CEO Chip Rogers said in a statement. “In the face of a nationwide shortage of workers, hoteliers need maximum flexibility to hire independent contractors, and contractors often prefer the flexibility of being classified this way. Despite this reality, the Labor Department is focused on making it harder—not easier—for hoteliers to hire the workers they need. AHLA is reviewing opportunities to legally challenge this regulation to restore certainty for America’s lodging industry.”
According to AHLA, the regulation will increase liability for businesses and reduce opportunities for independent contractors—“a status many workers prefer because it gives them more flexibility and autonomy over their work,” the Association argued in its statement. “This will make it more costly and time consuming for hoteliers to hire the independent contractors they need, harming the industry’s ability to maintain operations and reducing business opportunities for independent contractors.”
Similarly, the Association claimed in an email to its members that without a clearer focus on what aspects of a relationship are more significant when determining a worker’s classification, the classification will be entirely dependent on who is conducting the analysis and that the most relevant factors will change from person to person and court to court.
“This uncertainty will result in many in the hospitality industry being forced to reevaluate their business relationships with smaller entities,” the email said. “You may face unexpected liabilities with various individuals and entities that currently perform specialized services for your hotels. Meanwhile, millions of independent contractors will lose business opportunities or be forced back into traditional employment roles that they do not want.”
The email to members said that AHLA is considering possible litigation challenging the rule.