On October 11, 2022, the Wage and Hour Division of the U.S. Department of Labor (DOL) issued a Notice of Proposed Rulemaking that would make it more difficult for employers to properly classify workers as independent contractors under the federal Fair Labor Standards Act (FLSA).
The proposed rule clarifies the applicable test for determining whether a worker is an employee or an independent contractor under the FLSA and seeks to rescind the more employer-friendly test issued in 2021 by the Trump administration. The “totality of the circumstances” analysis announced by the proposed rule represents a return to a more stringent standard that employers must meet in order to avoid potential liability for independent contractor misclassification.
The proposed rule is scheduled for official publication in the Federal Register on October 13, 2022, after which the public will have 45 days to comment.
The Current 2021 Rule Issued by the Trump Administration
On January 6, 2021, during the final days of the Trump administration, the DOL published a rule (2021 Rule) announcing a five-factor “economic realities” test used to determine whether a worker is in business for him-or-herself (and therefore an independent contractor) or economically dependent on an employer (and therefore an employee). The five factors are:
- The nature and degree of the worker’s control over the work;
- The worker’s opportunity for profit or loss;
- The amount of skill required for the work;
- The degree of permanence in the working relationship; and
- Whether the work is part of an integrated unit of production.
The 2021 Rule heavily emphasized the first two factors, which were designated as “core factors” to be accorded more probative weight than the others. Under the 2021 Rule, if a worker exercises substantial control over key aspects of the performance of the work and has an opportunity for profit and loss (other than by working more hours or faster), the first two factors weigh in favor of independent contractor classification, and it is “highly unlikely” the three remaining factors could outweigh the first two factors.
How Does the New Proposed Rule Differ From the 2021 Rule?
The DOL’s proposed rule would return a “totality-of-the-circumstances” framework to the economic reality test. The proposed rule does away with “core factors,” and lists the following six non-exhaustive factors to be fully and equally considered:
- The worker’s opportunity for profit or loss based on his or her use of managerial skill;
- Whether the worker makes capital or entrepreneurial investments related to the performance of work, and if so, whether such investment relative to the employer’s investment indicates the worker is an independent business;
- Degree of permanence in the work relationship;
- Nature and degree of control exercised over the performance of work;
- Extent to which the work performed is an integral part of the employer’s business; and
- Skill and initiative, including whether a worker uses specialized skills to perform the work.
Economic dependence remains the ultimate inquiry for determining whether a worker is an independent contractor. However, the new proposed rule expands the analysis and requires consideration of all factors with equal probative weight, making it harder for independent contractor classifications to survive legal challenge.
News of the proposal brought a drop in share price for many companies that depend on independent contractors to keep their businesses running. If implemented, the impact of the new rule will be felt across all industries, as all employers will have to navigate a more complex and stringent test to avoid the significant liability that can result from worker misclassification.
The proposed rule must still work its way through the regulatory notice and comment process before it is formally adopted and may face legal challenges if and when it becomes final. As always, we will monitor further developments and can help employers navigate increasingly challenging workforce issues.