While the federal Department of Labor’s (DOL) new rule on independent contractor classification became effective as of March 11, 2024, legal challenges are continuing in federal court in Texas against the new rule with efforts to block it by arguing the DOL’s new rule violates certain federal laws such as the Administrative Procedure Act.  

Although the litigation is in Texas federal court, a ruling from the federal court there against the DOL’s new rule would likely void the new rule for all businesses nationwide.  

If your business uses and relies upon independent contractors, it is an extremely critical time to pay attention to legal developments involving this case in Texas and other legal developments pertaining to independent contractor classification. The decision from the Texas court could significantly impact your business and its classification of independent contractors.  

Additionally, among recent legal developments, the Wisconsin Supreme Court in late March effectively deferred to a decision by the Wisconsin Court of Appeals that upheld a decision by a Wisconsin Department of Workforce Development (DWD) Administrative Law Judge that more than 1,000 Wisconsin drivers for Amazon Logistics had been incorrectly classified as contractors and, therefore, were employees under the Wisconsin Unemployment Compensation classification test.  

Given the number of federal and state agencies that are involved in audits and reviews of independent contractor classification (IRS, DOL, EEOC, as well Wisconsin DOR and DWD) based on their own specific departmental classification tests, there are likely to be more developments as classification issues are at or near the top of the list in certain agencies for enforcement actions.  

There are constant legal challenges to independent contractors through private lawsuits asserting that contractors were improperly classified, thereby depriving workers of certain compensation, benefits, or legal protections.  

Simply put, the challenges in the independent contractor classification area are not going away. All businesses, including family owned and operated businesses, that use independent contractors or are considering the use of independent contractors need to be aware of the changes and challenges to the various classification tests for independent contractors that businesses are subjected to regarding their classification decisions.  

This is an area of the law that is complex, technical, extremely factually dependent, and poses significant risks depending on the number of contractors being used by a business. 

The DOL’s New Rule 

Effective as of March 11, 2024, the DOL’s new rule is being enforced. Although at least four federal lawsuits have been filed challenging the legality of the DOL’s new worker classification rule, no Court has yet enjoined or placed a stay on the rule being implemented and enforced.  

Most of the focus has been on a case in the Eastern District of Texas entitled Coalition for Workforce Innovation v. Su. While that litigation in Texas or other lawsuits could result in an injunction being granted to put the DOL’s new rule on hold, as of the date this article is being written, this has not occurred. 

Wisconsin family businesses and all businesses in Wisconsin and the nation that are subject to the FLSA are currently expected to follow the DOL’s new rule regarding independent contractor classification and would be subject to liability and damages for failing to properly classify a worker as an employee.  

This is most significant due to the FLSA’s requirement to pay overtime wages to employees for hours worked exceeding 40 hours per week. If your business uses contractors who work more than 40 hours per week, and they are reclassified as employees, the overtime award against your business could be quite significant. 

As a reminder, under the DOL’s new rule framework for its classification test, six non-exhaustive factors will be considered when examining the relationship between a worker and a potential employer: 

1. The degree to which the employer controls how the work is done 

2. The worker’s opportunity for profit or loss 

3. The amount of skill and initiative required for the work 

4. The degree of permanence of the working relationship 

5. The worker’s investment in equipment or materials required for the task 

6. The extent to which the service rendered is an integral part of the employer’s business 

The sixth factor in many circumstances will be exceptionally difficult or impossible to satisfy. Specifically, if the service provided by the contractor is a key part of the fundamental business of the employer, this factor will not be satisfied.  

For example, if an accounting firm uses contractor accountants during the tax season to supplement its regular employee accounting staff, that almost certainly would result in a finding that the service rendered is an integral part of the business, thereby failing this factor. Accountants who perform accounting services would almost certainly be considered integral to an accounting firm’s primary business and, therefore, could be re-classified as employees depending on review of the other five factors.  

In contrast, if the accounting firm uses contractors to plow its driveway or clean its offices, those likely would satisfy the sixth factor for purposes of the DOL’s new rule since such services are not integral to the accounting firm’s business — although whether the other five factors are met would depend on the specific factual circumstances.  

In other words, a business that meets only the sixth factor, but not the other five factors likewise could face potential liability. 

The DOL's new rule opted not to adopt an “ABC” test, which is only satisfied if an independent contractor meets all three specific factors in a three-factor test. Instead, the DOL's final rule will rely on the long-standing “economic realities” test that has been used by courts to determine whether a worker is an employee or independent contractor.  

This type of test reviews the totality of the circumstances to determine employee vs. contractor status primarily based on the above six factors, and no one factor is determinative. 

Currently, businesses that use or want to use independent contractors need to monitor the status of the legal challenges to the DOL’s new rule, as well as legislative and judicial developments to independent contractor classification involving other federal agencies besides the DOL as well as state agencies.  

It is important to understand that if the DOL pursues an audit, the above rule will apply despite the ongoing litigation. Understanding the new rule is imperative for all family businesses and other businesses.