Independent contractor update: Federal retreat, state gains momentum

In a recent development, the U.S. Department of Labor confirmed it will stop enforcing the Biden-era rule on independent contractor classification. This reversal represents a meaningful victory for financial security professionals who prefer the flexibility and autonomy of operating as independent contractors rather than traditional employees. While the federal government steps back, at least one state is moving forward with its own approach — signaling this issue remains far from settled.

On May 1, the DOL issued Field Assistance Bulletin No. 2025-1, stating that the Wage and Hour Division will cease applying or enforcing the 2024 rule titled “Employee or Independent Contractor Classification Under the Fair Labor Standards Act” and instead return to the “economic reality” test previously in effect.

The 2024 rule, introduced by the Biden administration, aimed to address worker misclassification concerns, particularly among gig economy workers such as those working for Uber, Lyft and Instacart. The 2024 rule hoped to provide employee protections under the Fair Labor Standards Act, including minimum wage and overtime pay.

Although the rule did not explicitly target the financial security profession, its interpretation posed potential risks to the industry due to the lack of carve-outs, or exemptions, for financial security professionals.

Despite this federal development, New Jersey has moved in a different direction. The state recently introduced new regulations that apply a stricter “ABC test” to determine worker classification. This signals a more restrictive approach that could impact professionals operating as independent contractors within that state.

The old is new  

The 2024 rule, which the DOL will no longer enforce, outlined six primary factors to determine whether a worker should be classified as an employee or an independent contractor. These factors included: (1) the worker’s opportunity for profit or loss, (2) the nature and degree of control, (3) the permanence of the working relationship, (4) investments made by both the worker and the employer, (5) the extent to which the work performed was integral to the employer’s business and (6) the worker’s skill and initiative.

In addition, the rule included a catch-all provision, allowing consideration of any other relevant factors that reflect the economic dependence of the worker on the employer.

Under the 2024 rule, all factors were to be weighed together under a “totality of the circumstances” approach, with no single factor being determinative. This framework made it more challenging for employers to classify workers as independent contractors, potentially increasing the likelihood of reclassification as employees.

However, the DOL’s return to prior guidance under the “economic reality” framework offers greater flexibility in determining independent contractor status. This approach considers a range of factors to assess whether a worker is economically dependent on the employer or operates as an independent contractor. These factors include:

1. The extent to which the services rendered are an integral part of the principal’s business.

2. The permanency of the relationship.

3. The amount of the alleged contractor’s investment in facilities and equipment.

4. The nature of and degree of control by the principal.

5. The alleged contractor’s opportunities for profit and loss.

6. The amount of initiative, judgment or foresight in open-market competition with others required for the success of the claimed independent contractor.

7. The degree of independent business organization and operation.

Additionally, the rule identified two “core factors” that carry the greatest weight: (1) the nature and degree of control over the work, and (2) the worker’s opportunity for profit or loss.

In its bulletin, the DOL also noted that it is currently reassessing the issue and is working toward establishing a new standard for determining independent contractor status under the FLSA.

Court challenges to independent contractor rule 

Since the implementation of the 2024 rule, several businesses that rely on independent contractors have filed legal challenges asserting that the rule could significantly disrupt their operations. These lawsuits generally seek injunctive relief to prevent the DOL from enforcing the rule.

In one such case, Frisard’s Transportation, LLC v. United States, the U.S. Court of Appeals for the Fifth Circuit recently issued a stay in the proceedings. This action was granted after the DOL submitted a status report indicating that it was actively reconsidering the 2024 rule at the center of the litigation. The outcome of this and similar cases will likely be shaped by the DOL’s stated intention to revise the independent contractor classification framework.

New Jersey and the ‘ABC test’ 

In contrast to the DOL, the New Jersey Department of Labor and Workforce Development recently issued proposed regulations intended to clarify how employers should apply the state’s ABC test to determine whether a worker is classified as an employee or an independent contractor. Under New Jersey law, the ABC test is used to enforce wage, benefit and labor protections. Misclassification can lead to significant financial penalties for employers.

The ABC test imposes a more stringent standard than the DOL’s 2024 rule, placing the burden on employers to demonstrate that a worker qualifies as an independent contractor. To meet this standard, all three of the following criteria must be satisfied:

1. The worker is free from control or direction in performing the work;

2. The work is performed outside the usual course of the employer’s business or outside its physical premises; and

3. The worker is engaged in an independently established trade, occupation, profession or business.

The proposed updated regulations could significantly impact the ability of individuals in the financial security profession to continue operating as independent contractors. If adopted as written, these changes may result in the reclassification of financial security professionals as employees under New Jersey law, eliminating the flexibility currently afforded by independent contractor status. Such a shift would have the greatest impact on the business and family clients these professionals serve.

In response, Finseca has mobilized grassroots efforts across the state to engage New Jersey legislators to emphasize the importance of preserving independent contractor status for financial security professionals. These professionals serve a critical and distinct role in helping New Jersey residents achieve financial security. Finseca has formally requested that insurance producers, broker-dealers, and investment advisors be exempted from the ABC test under the final rule.

Alex Kim is vice president, public policy, with Finseca. He may be contacted at [email protected].