The U.S. Department of Labor (“DOL”) published its Notice of Proposed Rulemaking on Oct. 13 to help employers and workers determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act.
The rule would establish a non-exhaustive six-step economic realities test for determining whether a worker is an employee or independent contractor.
Purpose of Proposed Rule
The proposed rule aims to provide guidance on classifying workers so that workers are not misclassified as independent contractors. Independent contractors are not covered under federal labor laws. The DOL has long expressed concern that misclassification of workers is a serios problem that promotes wage theft, leads to unfair competition, and damages the economy at-large.
What was the Problem with the Prior Test?
In January 2021, the DOL published a rule titled “Independent Contractor Status Under the Fair Labor Standards Act” (“2021 IC Rule”). The 2021 IC Rule identified five economic reality factors to guide the inquiry into a worker’s status as an employee or independent contractor. Two of the five identified factors—the nature and degree of control over the work and the worker’s opportunity for profit or loss—were designated as “core factors” that are the most probative and carry greater weight in the analysis.
Effective May 6, 2021, the DOL withdrew the “Independent Contractor Rule.” However, a lawsuit was filed challenging the DOL’s delay and withdrawal of the 2021 IC Rule. On March 14, 2022, a federal district court in Texas blocked the DOL’s withdrawal and concluded that the 2021 IC Rule became effective on the original effective date of March 8, 2021.
The DOL believes that the 2021 IC Rule does not fully comport with the FLSA’s text and purpose as interpreted by the courts.
Factors of Proposed Rule
Under the new proposed rule, employers would use a totality-of-the-circumstances analysis with a broad focus on six factors. Those factors are:
- Opportunity for profit and loss;
- Investment by the worker and employer;
- The degree of permanence of the working relationship;
- The nature or degree of control;
- The extent to which the work is integral to the employer’s business; and
- The degree of skill and initiative the worker exhibits.
Impact of the Proposed Rule
According to the DOL, the new Rule would do the following:
- Align the DOL’s approach with courts’ FLSA interpretation and the economic reality test.
- Restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA.
- Ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
- Revert to the longstanding interpretation of the economic reality factors. These factors include the investment, control and opportunity for profit or loss factors. The integral factor, which considers whether the work is integral to the employer’s business, is also included.
- Assist with the proper classification of employees and independent contractors under the FLSA.
- Rescind the 2021 IC Rule.
Significance to Employers
Although the 2021 IC Rule is still in effect, if the proposed rule stands, it will be more difficult to establish an independent contractor relationship. Business advocates and numerous politicians have already voiced concern about the proposed rule and its impact on businesses and the freedom of workers to work as independent contractors. Employers should monitor developments and carefully consider the factors required to properly classify workers as independent contractors and the associated risks.
What is Next?
The DOL encourages interested parties to submit comments on this proposal by November 28, 2022. The full text of the proposed rule, as well as information on the deadline for submitting comments and the procedures for submitting comments, can be found at www.federalregister.gov. The 45-day comment period closes at 11:59 p.m. ET on November 28, 2022.
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