In January 2024, the Department of Labor (DOL) released a final rule restoring Obama-era standards used to determine when a worker should be classified as an independent contractor or an employee who is guaranteed minimum wage, overtime and other protections under the Fair Labor Standards Act.
The rule grants equal consideration to each of the six factors included in the DOL’s “economic realities test” to determine whether a worker should be classified as an employee or an independent contractor:
- The opportunity for profit or loss depending on managerial skill.
- Investments made by the worker and employer.
- The degree of permanence of the work relationship.
- The nature and degree of the individual’s control over their work.
- The degree to which the individual’s work is essential to an employer’s business.
- The worker’s skill and initiative.
In addition to the six factors, the final rule explains that, in some circumstances, “additional factors” may also be considered if they are relevant to the overall question of a worker’s economic dependence on an employer.
National Club Association Outlook and Considerations
The DOL’s final rule is intended to reduce the risk that employees are misclassified as independent contractors. For the club industry, an equal consideration of all six “economic realities” factors is likely to raise labor costs. However, the differing policies across private clubs toward workers historically classified as independent contractors, such as caddies, will make it difficult to determine employment status.
The full effect of this rule on the club industry will likely be impacted by litigation of the rule by various professions with a heavy representation of independent contractors. Already, a group of freelance writers and journalists who wish to keep their status as independent contractors, filed a challenge to the final rule in a Georgia federal court. The lawsuit—which alleges that the rule is overly vague—aims to block the rule before it takes effect March 11.
A similar challenge to the final independent contractor rule was brought before the U.S. Court of Appeals for the Fifth Circuit was passed down to a Texas district court for consideration. The case brought forward by the Coalition for Workforce Innovation, Associated Builders and Contractors, and the Financial Services Institute seeks to revive previous litigation targeting the Biden administration’s ‘withdrawal’ rule in 2021 that sought to rescind the Trump-era independent contractor regulation. This action by the three business groups is intended to speed up the judicial process.
If either court imposes an injunction against DOL, employers will not be forced to reexamine their worker classifications. However, if an injunction is not granted, club managers may be in the position of reclassifying some workers as employees or hiring third-party vendors to manage caddie programs to avoid misclassification penalties under the Fair Labor Standards Act.