Is that truck driver an employee or an owner-operator? The U.S. Department of Labor’s final rule on determining independent contractor status outlines six factors to be analyzed in a multi-factor approach to defining whether a worker is an employee or IC.
In a final rule published in the Federal Register on Jan. 10, the DOL changed its Wage and Hour Division regulations on determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act.
The new rule provides guidance on how six economic reality factors should be considered in making an IC vs employee determination. The department has adopted a “totality of the circumstances” analysis, so no single factor should make or break an IC determination, and additional factors may be considered.
The six factors are:
- Opportunity for profit or loss depending on managerial skill.
- Investments by the worker and the potential employer.
- The degree of permanence of the work relationship.
- The nature and degree of control.
- The extent to which the work performed is an integral part of the potential employer’s business.
- Skill and initiative.
“This rule is not intended to disrupt the businesses of independent contractors who are, as a matter of economic reality, in business for themselves,” said the Department of Labor in its final rule.
The final rule emphasized the multi-factor approach again and again. In summarizing comments on the proposal, the Labor Department explained that the department would not include requested industry-specific carve-outs, because failing to meet any of the standards outlined doesn’t automatically force an employee classification.
Replacing Trump-Era IC Definition
The new rule repeals and replaces a 2021 Trump administration rule that was welcomed by trucking but which critics said made it harder to prove employees were being “misclassified” as independent contractors. That previous rule simplified the definition and set up two “core factors” to use in making the determination:
- Nature and degree of control over work.
- Opportunity for profit or loss based on initiative and/or investment.
The Biden Administration tried to withdraw the rule, published shortly before President Biden took office, but was blocked by a court ruling from doing so. So, the Department of Labor started the rulemaking process all over again and issued a proposed rule in October 2022, which many in the industry said would make it harder for trucking companies to demonstrate the independent contractor status of their owner-operator drivers.
The final rule is only “incrementally” better than the original proposal, according to the transportation attorneys at Scopelitis, Garvin, Light, Hanson & Feary.
“As compared to the initial proposed rule, there were some incrementally positive changes in response to comments filed by commenters... though not enough to make the final rule favorable on balance,” said the firm in an email to industry stakeholders.
An email from the trucking and logistics attorneys at Becker LLC said that, "Unlike the 2021 Independent Contractor Rule which expressly provided for two key factors, employers will now be forced to guess which of the ... factors may bear greater weight, thus creating much uncertainty for companies."
No ABC Test
The good news is that the department did not implement a restrictive “ABC test,” where all three factors must be met in order for a worker to be deemed an independent contractor.
The Supreme Court has previously ruled that the economic reality test is the standard that should be used in determining workers’ classification under the FLSA, looking at "the circumstances of the whole activity" rather than the three isolated factors in an ABC test.
The Department explained that it could only implement an ABC test if the Supreme Court revisits its precedent or if Congress passes legislation changing the FLSA.
The rule is scheduled to be effective 60 days after publication, or March 11. However, Scopelitis anticipates business groups will go to court to challenge DOL’s authority to issue this regulation.
Trucking Concerns About the Owner-Operator Model
The Intermodal Association of North America said the new requirements “threaten to force the reclassification of over 80% of intermodal drayage drivers that currently enjoy independent contractor status.”
“For decades, the independent contractor business model has been widely favored by intermodal motor carriers and drivers,” said IANA President and CEO Joni Casey in a statement. “Although employee-driver positions are readily available, these owner-operator drivers explicitly chose the freedom, flexibility, and independence that comes with small business ownership.”
The American Trucking Associations has vowed to fight the new rules.
“I can think of nothing more un-American than for the government to extinguish the freedom of individuals to choose work arrangements that suit their needs and fulfill their ambitions,” said ATA President and CEO Chris Spear in a statement. “More than 350,000 truckers choose to work as independent contractors because of the economic opportunity it creates and the flexibility it provides.
“It's unfortunate that the administration has chosen to replace a clear and straightforward standard with a tangled mess that weakens our supply chain and undermines the livelihoods of hundreds of thousands of truckers across the country," Spear said. “ATA will work with members of Congress and other stakeholders to defeat this ill-advised rule.”
This change in the laws may lead to independent contractors being reclassified as employees for FLSA purposes, said the Becker attornyes. "As the trucking industry relies heavily on the use of independent contractors, we are anticipating trucking companies may be on the high priority list for DOL scrutiny on worker classifications under the new final rule."
'Confusing and Conflicting System'
The Transportation Intermediaries Association released a statement saying, "Independent contractors play a pivotal role within our nation's supply chain, serving as essential cogs in its seamless operation. Logistics companies depend significantly on their contributions to the supply chain and workforce. The notion of reclassifying these vital independent contractors as employees and creating a confusing and conflicting system to determine employment status poses a grave threat to the well-being of the supply chain, small businesses, and the American economy."
Owner-Operator Independent Drivers Association President Todd Spencer criticized the uncertainty that changing regulations create.
“Truckers are tired of the endless parade of classification rules that do not listen to their concerns,” Spencer said in a statement. “This constantly changing landscape has created uncertainty that makes it more difficult for them to operate their businesses.”
Spencer said the association is still reviewing the details of the final rule, but it’s concerned that some of the details “may disregard specifics of the trucking industry and could lead to the reclassification of independent contractors as employees.
“With that said, we support the Department’s stated intent to follow decades-long practices for classification under the Fair Labor Standards Act, as well as its rejection of the ABC test as signed into law in California with AB5.”
Digging Into the 6 Factors of the DOL’s New Independent Contractor Rule
This factor considers “whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work.”
This might include, for instance:
- If the worker can determine or negotiate the rate or pay.
- Whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed.
- Whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work.
- Whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.
The department added that, if a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee.
This factor looks at “whether any investments by a worker are capital or entrepreneurial in nature.”
The DOL defines these investments as ones “that generally support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach.”
Investments or costs “borne a worker to perform their job” are not considered entrepreneurial. Nor are “costs unilaterally imposed by an employer on a worker.”
What About Owner-Operators Leasing Trucks From Carriers?
In response to comments on the original proposal, the final rule recognizes that leasing a truck to be able to provide truck driving services may be capital investment or entrepreneurial in nature, even if leased from a trucking company and not an independent third party.
One of the comments on the proposal said truck drivers who wholly own or independently finance a truck should be considered independent contractors, but contended that employer-sponsored leases for trucks would point more toward an employee classification.
The department in its final rule explained that while it generally agrees with this distinction, “it is hesitant to state that the existence of an employer-sponsored lease can never indicate independent contractor status.”
If a driver chooses to lease a truck from the employer, the DOL said, it could still be considered an entrepreneurial investment of an independent contractor. But, apparently with predatory leasing issues in mind, the DOL explained that for this to be the case, the worker would have to be:
- Able to consider independent financing options.
- Able to meaningfully negotiate the terms of the lease with the employer.
- Not required by the employer to work for it for a minimum period of time.
- Not prohibited by the employer from using the leased truck to work for others.
How Big Does an IC Investment Need to Be?
One thing that changed from the proposed rule is the way it called for comparing the workers’ investment to the employers’.
The final rule explains that “the worker’s investments need not be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of investments or the sizes of the worker and the potential employer.
"Instead, the focus should be on comparing the investments to determine whether the worker is making similar types of investments as the potential employer (even if on a smaller scale) to suggest that the worker is operating independently, which would indicate independent contractor status.”
The rule cites a hypothetical truck driver described by the Owner-Operator Independent Drivers Association in its comments on the proposal. Under the original proposal, OOIDA said, an owner-operator “would be an independent contractor if [the driver is] working with a three-truck carrier,” but the same driver would be an employee if the driver goes “to work for a carrier with hundreds or thousands of trucks.”
Recognizing the problem, the DOL changed the final rule to a more qualitative rather than quantitative approach.
When the work relationship is indefinite in duration or continuous, the rule says, it would “weigh in favor of the worker being an employee."
If the work relationship is “definite in duration, non-exclusive, project-based, or sporadic, based on the worker being in business for themself and marketing their services or labor to multiple entities,” that would weigh in favor of the worker being an independent contractor.
However, it explained that this is not black and white.
For instance, if a lack of permanence is due to operational characteristics of the business or industry and the workers they employ, rather than the workers’ own independent business initiative, this would not indicate that the workers are independent contractors.
In the comments, critics were concerned that an independent contractor who had fostered successful, long-term business relationships would be considered employees under this factor.
The DOL in the final rule said the permanence factor, like other factors in the economic reality test, is best understood in the overall context of the relationship between the parties where all relevant aspects are considered.
“The department also clearly recognizes and appreciates that people who are in business for themselves often rely on repeat business and long-term clients or customers in order for their business to remain economically viable or successful.”
The amount of control of an employer over a worker is often a major point of discussion in determining independent contractor status in the trucking industry, and the new rule covers a number of aspects of this question.
Originally, the proposed regulation included a sentence stating that an employer’s compliance with legal obligations, safety or health standards, or requirements to meet contractual or quality control obligations, may indicate that the employer is exerting control and thus the worker would be considered an employee.
“A very large proportion of the comments received regarding the control factor” that the department received were about this sentence.
Trucking was among several heavily regulated industries to object to that part of the proposal.
Scopelitis called the provision “untenable in the highly regulated trucking and logistics industries,” and said that “any rollback of requirements for owner-operators to comply with such obligations will almost certainly lead to less safe roads in our nation.”
In the final rule, the department changed the regulation to state that “actions taken by the potential employer for the sole purpose of complying with a specific, applicable federal, state, tribal, or local law or regulation are not indicative of control.”
However, the final rule also was revised to state that actions “that go beyond compliance” with those laws and instead serve the employer’s own compliance methods, safety, quality control, or contractual or customer service standards, may indicate control of the worker and thus employee status.
The DOL emphasized in the final rule that “the facts and circumstances of each case must be assessed, and the manner in which the employer chooses to implement such obligations will be highly relevant to the analysis.”
As an example, it said, a company that requires everyone who enters a construction site to wear a hard hat as required by city ordinance is not exerting control. However, if the company chooses a specific time and location for its own safety briefings that are not specifically required by law and requires all workers to attend, that may indicate control and an employee relationship.
The new rule also said that control could be indicated by an employer supervising the performance of the work — "including through technological means of supervision, such as monitoring systems that can track a worker’s location and productivity.”
However, it also said that “while the act of collecting data through monitoring systems could be used to supervise the performance of work, it might instead serve other operational needs of the employer not related to control.”
Control: Setting a Price or Rate for Goods or Services
If an entity other than the worker sets a price or rate for the goods or services offered by the worker, or if the worker simply accepts a predetermined price or rate without meaningfully being able to negotiate it, is an indicator of control and an employee relationship, the DOL said.
Control: Ability to Work for Others
Another consideration under the control factor, and another one that comes up frequently in the question of truck owner-operator drivers, is whether the employer “explicitly limits the worker’s ability to work for others” or “places demands on workers’ time that do not allow them to work for others.” In this case, the worker is most likely an employee rather than IC.
On the other hand, the department says, having multiple jobs doesn’t automatically make a worker an independent contractor.
Some commenters urged the DOL to create an exception for industries like trucking where legal requirements make it more complicated for drivers to use the same equipment to work for another motor carrier.
The final rule cited a recent court decision regarding trucking. The company retained sole discretion to deny the driver’s request to haul freight for another carrier. It also reserved the right to arrange for third-party monitoring of compliance with federal safety regulations at the driver’s expense if he drove for other carriers. And even if the driver received approval to haul for another carrier and could have afforded to pay for third-party compliance monitoring, he would have been required to remove or cover the company’s identification on his truck and to display his own or the other company’s information.
The court determined that this system “was so complex and onerous that drivers could not, as a practical matter, haul loads for other carriers,” which weighed in favor of employee status.
The DOL said that this was an example of going beyond compliance with a law or regulation in a way that serves the business’s own compliance methods. The final rule was revised to indicate that such restriction and demands can indicate indirect means of limiting workers’ ability to work for others and therefore point to an employee relationship.
This is another factor that has the potential to affect the trucking owner-operator model.
The department explained that most courts adopt a common-sense approach to determining whether the work or service performed by a worker is an integral part of a potential employer’s business. For example, if the potential employer could not function without the service performed by the workers, then the service they provide is integral.
A number of commenters expressed concerns that this part of the control factor was an attempt to adopt one of the prongs of the ABC test.
However, the department pointed out that “although there may be conceptual overlap between the department’s proposed integral factor and Prong B of the ABC test… the department is not adopting an ABC test.”
An ABC test such as the controversial one adopted by the state of California requires all three of the A, B, and C factors to be met for IC status. The “B” prong, requiring that the worker performs work that is outside the usual course of the hiring entity’s business, is virtually unattainable in trucking’s owner-operator model.
The department emphasized that the “integral” factor as just one part of a multifactor inquiry looking at the “totality of the circumstances.”
The department proposed that the skill and initiative factor consider “whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative.”
If the worker lacks specialized skills, the department says, it points to a likelihood that they are employees rather than ICs.
Because both employees and independent contractors can be highly skilled and/or bring specialized skills to the work relationship, the department discussed how focusing on whether the worker uses “the specialized skills in connection with business-like initiative” is helpful in distinguishing between the two classifications.
Several trucking comments on the proposal pointed out that although truck driving typically is not classified as ‘skilled’ labor in other contexts, the skills needed to obtain a commercial driver’s license make this type of work specialized, whereas a regular auto driver would not be considered to have specialized skills.
The Department of Labor agreed and in the final rule explained that this factor would indicate independent contractor status for a worker who uses truck-driving skills in connection with business-like initiative.
How We Got Here
Congress enacted the Fair Labor Standards Act in 1938 to eliminate “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.”
The FLSA generally requires employers to pay nonexempt employees at least the Federal minimum wage for all hours worked and at least one and one-half times the employee’s regular rate of pay for overtime. The act also requires covered employers to maintain certain employee records and prohibits retaliation against employees who are discharged or discriminated against after, for example, filing a complaint regarding their pay.
However, the FLSA’s protections do not apply to independent contractors. And the act did not define “independent contractor.”
It does include definitions of:
- Employer: Any person acting directly or indirectly in the interest of an employer in relation to an employee.
- Employee: Any individual employed by an employer.
- Employ: “To suffer or permit to work.”
Since the 1940s, the Labor Department and courts have applied an economic reality test to determine whether a worker is an employee or an independent contractor under the FLSA. The ultimate inquiry is whether, as a matter of economic reality, the worker is economically dependent on the employer for work (and is thus an employee) or is in business for themself (and is thus an independent contractor).
In assessing economic dependence, the DOL explained, courts and the department have historically conducted a totality-of-the-circumstances analysis, considering multiple factors to determine whether a worker is an employee or an independent contractor, with no factor or factors having predetermined weight. These factors generally include the opportunity for profit or loss, investment, permanency, control, whether the work is an integral part of the employer’s business, and skill and initiative.
However, In January 2021, the Department published a rule titled “Independent Contractor Status Under the Fair Labor Standards Act” (2021 IC Rule), providing guidance on the classification of independent contractors under the FLSA. It marked a departure from the longstanding use of the economic reality test and instead identified five economic reality factors, with two being defined as "core factors." This rule was generally viewed by trucking to be favorable for the owner-operator model.
Because the rule was a so-called “midnight rule” published in the final days of the Trump administration, the incoming Biden administration tried to withdraw the new rule later that year.
But the administration lost in a court challenge in 2022 that ruled the 2021 law had gone into effect on March 8, 2021, resulting in the rulemaking process that has given us this final rule.
Updated 1/17/2024 to add comment from Becker LLC.