On October 11, 2022, the Department of Labor (“DOL”) released a proposed rule concerning worker classification under the Fair Labor Standards Act (“FLSA”).
For more than 80 years, both the DOL and courts applied a totality-of-the-circumstances “economic reality test” to determine whether a worker was an employee or an independent contractor. Then, in 2021, the DOL published a rule changing the methodology of the employee-versus-independent contractor test. The 2021 Rule utilizes five factors to determine whether a worker is an employee or independent contractor: (1) the nature and degree of control over the work; (2) the worker’s opportunity for profit or loss; (3) the amount of skill required for the work; (4) the degree of permanence of the working relationship between the worker and the employer; and (5) whether the work is part of an integrated unit of production. Two of the factors (control over the work and opportunity for profit/loss) carry a greater probative weight in the analysis – if those two core factors point towards the same classification, there is a “substantial likelihood” that is the worker’s accurate classification. The rule also narrows the circumstances under which certain factors can be considered.
The DOL previously tried to repeal the 2021 Rule and simply return to the totality of the circumstance status-quo, but its efforts got tied up in litigation and have not been successful. Now, the DOL is trying again, and aims to entirely rescind the 2021 Rule and replace it with a new proposed rule titled “Employee or Independent Contractor Classification Under the Fair Labor Standards Act.” The proposed rule’s stated purpose is to create consistency between the DOL’s employee-versus-independent contractor analysis, judicial precedent, and the text and purpose of the FLSA. The proposed rule would resurrect the totality-of-the-circumstances analysis, but this time as a published regulation. It will not affect any other worker classification tests, such as those used by the Internal Revenue Code, National Labor Relations Act, or Title VII. Under the proposed rule, no one factor or subset of factors would necessarily be dispositive, and the weight given to each factor would depend on the facts and circumstance of the particular case. The proposed rule includes a detailed discussion of six factors to be considered: (1) opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the employer; (3) degree of permanence of the work relationship; (4) nature and degree of control of the employer; (5) the extent to which the work performed is an integral part of the employer’s business; and (6) the employee’s skill and initiative. It also makes clear additional factors may be considered as appropriate and indicates that simply having multiple jobs does not weigh in favor of independent contractor status and exclusivity does point to the permanency factor.
The proposed rule is set to be published in the Federal Register on October 13, 2022 and will be open to public comment for 45 days after its publication. Employers interested in commenting have until November 28, 2022 to submit their arguments and concerns to the DOL. Following the comment period, the DOL will decide whether to move forward with the final rule. It if does, it will likely be issued sometime in late 2023 or early 2024.
