U.S. Labor Department Proposes New Rule on Independent Contractors

On October 13, the United States Department of Labor (DOL) published a Notice of Proposed Rulemaking regarding the classification of employees and independent contractors under the Fair Labor Standards Act (FLSA). After President Biden took office, the DOL attempted to rescind and withdraw an independent contractor rule (the 2021 Rule) that had been put in place in the waning days of the Trump Administration. The DOL’s attempts to withdraw the 2021 Rule were stymied by judicial action. Now, the DOL has changed direction to choose rule-making. With its proposed rule, the DOL seeks to return and enhance the long-standing “economic realities” test that guides employers and workers in classifying workers either as employees or independent contractors under the FLSA. According to the DOL’s press release: “Misclassification is a serious issue that denies workers’ rights and protections under federal labor standards, promotes wage theft, allows certain employers to gain an unfair advantage over law-abiding businesses, and hurts the economy at large.”

The Proposed Rule

The proposed rule seeks to provide guidance on classifying workers which it argues is consistent with long-standing judicial precedent. The DOL submits the proposed rule will “preserve essential workers’ rights and provide consistency for regulated entities.” The DOL has identified assessing a worker’s economic dependence on the employer as the ultimate inquiry for evaluating whether the worker is an independent contractor or an employee. It seeks to reduce the number of misclassified workers who are denied minimum wage and overtime protections of the FLSA.

Six Factors

The existing 2021 Rule relies on five factors and gives particular weight to “control” and the “opportunity for profit or loss.” These two factors are regarded as core factors. The new proposed rule seeks to wholly rescind the 2021 Rule. It proposes economic dependence be assessed by considered at least six factors, which include the five factors from the 2021 Rule. The weight given each factor, however, is not predetermined but will differ according to the facts and circumstances of each situation. In addition, the proposed rule will evaluate whether the worker’s activity is important or central to a business’s operations. It is anticipated this analysis will result in more workers being found to be employees, reducing the number of workers who can be treated as independent contractors.

To determine whether a worker is economically dependent on an employer for work, the proposed rule advocates considering at least six factors as guides to conduct a totality of the circumstances analysis. The six factors are:

1. Opportunity for profit or loss depending on managerial skill
2. The relative investments by the worker and the employer
3. The degree of permanence of the working relationship
4. The nature and degree of control
5. The extent to which the work performed in an integral part of the employer’s business
6. The worker’s skill and initiative

No one factor or subset of factors is dispositive and the weight to give each factor depends on the facts and circumstances of a particular case. Further, the DOL emphasizes that the six factors are not exhaustive and additional factors may be considered.

Why?

The DOL argues the proposed rule will align the DOL with courts’ interpretation of the FLSA and the economic realities test. It wants a broader evaluation of more factors, including a worker’s investment, the entity’s control and the worker’s opportunity for profit or loss. Also critical is whether the work performed is integral to the employer’s business. The DOL submits that evaluating the totality of the circumstances, rather than focusing on just two core factors, will provide more workers with legal wage and hour protections. The DOL has provided a 45-day comment period which ends on November 28, 2022. All comments should be submitted online or in writing to the DOL’s Division of Regulations, Legislation and Interpretation of the Wage and Hour Division.

Should you wish to discuss how this change affects your employees, please reach out to Jeralyn Baran or a member of HMB’s team.