Today the U.S. Department of Labor (DOL) published a new proposed rule defining employee versus independent contractor status under the Fair Labor Standards Act (FLSA). The proposed regulation would move the "economic realities" test closer to prior interpretations of the FSLA, replacing a regulation published in January 2021 at the end of the Trump administration. The new rule proposes to return to a multi-factor test that looks at the totality of the circumstances and does not weigh or elevate any factor above another.
Controversy Surrounds a January 2021 Rulemaking on Independent Contractor Status
Prior to January 2021, DOL relied on informal guidance defining independent contractor status under the FLSA, with the term "independent contractor" not appearing in any DOL-published regulations. In January 2021, for the first time, Trump's DOL published a notice of rulemaking changing DOL's prior informal guidance to focus the "economic realities" on two core factors: (i) the nature and degree of control over the work and (ii) the worker's opportunity for profit or loss. That regulation was to become effective March 8, 2021.
Days before that regulation became effective, on March 4, 2021, Biden's DOL published a new regulation delaying the effective date of the prior regulation. Then on May 6, 2021, DOL published an additional regulation withdrawing the January 2021 rulemaking. On March 14, 2022, a federal court in the Eastern District of Texas issued a decision vacating the Biden-era rulemaking with the effect of reinstating the Trump-era regulation. The DOL appealed that decision to the Fifth Circuit, which upon notice of the rulemaking proposed today, stayed the litigation over the prior rule until December 7, 2022.
DOL Proposes a Return to Pre-2021 Definitions of Independent Contractor Status
The new economic realities test would return the focus from two core factors to focus on six non-exhaustive factors about whether the workers are economically dependent on the employer for work (employees) or in business for themselves (independent contractors). The rulemaking proposes the following six factors:
- 1. Opportunity for profit and loss depending on managerial skill. If the worker exercises managerial skill that affects the worker's opportunity for profit, the worker is more likely to be an independent contractor. This factor can also consider whether the worker can negotiate pay, decline or reprioritize work, market themselves to secure more work, decide to hire employees, purchase materials and equipment, and/or rent space.
- 2. Investments by the worker and the employer. Capital or entrepreneurial investments by the worker to support an independent business weigh in favor of independent contractor status. The worker's investments should be considered relative to the investments by the employer but do not need to be equal in order to support independent contractor status.
- 3. Degree of permanence of the work relationship. Definite, non-exclusive, project-based, and/or sporadic work weigh in favor of independent contractor status, although seasonal and temporary work does not necessarily indicate independent contractor status.
- 4. Nature and degree of control. Lack of control by the employer over the worker's performance may indicate independent contractor status. Facts relevant to the determination of control may include whether the employer sets the worker's schedule, degree of supervision, limitations on the worker's ability to work for others, and employer control over rates and prices. The proposed rule would expand the January 2021 definition of control to include economic aspects of the working relationship, legal compliance, safety standards, and contractual or customer service standards, which may each provide indicia of control favoring employee or independent contractor status.
- 5. Extent to which work performed is an integral part of the employer's business. When the work performed is not critical, necessary, or central to the employer's business, this factor weighs in favor of the worker being an independent contractor. The factor does not focus on the role of the worker but, instead, the role of the function they perform to the business.
- 6. Skill and initiative. A worker's use of specialized skills and use of those skills in connection with a businesslike initiative indicates the worker is more likely to be an independent contractor.
The rule provides a seventh, catchall, factor that states "[a]dditional factors may be relevant" if the factor in some way indicates whether the worker is in business for themselves or economically dependent on the employer.
Interested Employers Have 45 Days to Comment on the Proposed Rulemaking
DOL's proposed rule is not yet final. The DOL is currently accepting comments on the proposed rule for 45 days, until November 28, 2022. Employers should seek the advice of their attorneys before submitting comments.
Tips for Employers
Employee versus independent contractor misclassification can potentially cause significant liability for employers, including risk of class actions or government audits and investigations. Although the proposed rulemaking is not final, employers should begin to consider how the proposed rule may impact how they classify employees or independent contractors. The proposed rule only applies to classification under the FLSA and other federal, state, and municipal authorities have rules that impose varied standards that may classify employees differently. DWT will continue to monitor and provide updates on the changing state of the law. Employers should consult with their attorneys regarding whether their employees or independent contractors are properly classified and, where possible, develop strategies to bolster that classification.