In latest edition of The Wright Toolbox:
- The Department of Labor is Proposing New Rules for Employee/Independent Contractor Classification
The Department of Labor is Proposing New Rules for Employee/Independent Contractor Classification
On October 13, 2022, the Department of Labor (“DOL”), Wage and Hour Division, proposed new regulations to revise its standards for analyzing employee or independent contractor classification under the Fair Labor Standards Act (FLSA or Act).
As we all know, the FLSA generally requires covered employers to pay nonexempt employees at least the Federal minimum wage for all hours worked and at least one and one-half times the employee’s regular rate of pay for every hour worked over 40 in a workweek. However, the FLSA’s minimum wage and overtime pay protections do not apply to independent contractors. The term “independent contractor” refers to workers who, as a matter of economic reality, are not economically dependent on their employer for work and are in business for themselves. Such workers are commonly referred to by different names, including “independent contractor”, “self-employed”, and “freelancer.” The FLSA does not define the term “independent contractor,” rather it contains expansive definitions of “employer,” “employee,” and “employ.”
For more than 7 decades, the DOL and courts have applied an “economic reality test” to determine whether a worker is an employee or an independent contractor under the FLSA. The ultimate inquiry is whether, as a matter of economic reality, the worker is either economically dependent on the employer for work (and is thus an employee) or is in business for themselves (and is thus an independent contractor). To answer this ultimate inquiry of economic dependence, the courts and the DOL have historically conducted a totality-of-the circumstances analysis, considering multiple factors to determine whether a worker is an employee or an independent contractor under the FLSA. The factors generally considered included the opportunity for profit or loss, investment, permanency, the degree of control by the employer over the worker, whether the work is an integral part of the employer’s business, and skill and initiative.
In January 2021, the DOL published a rule titled “Independent Contractor Status Under the Fair Labor Standards Act” (2021 IC Rule), providing guidance on the classification of independent contractors under the FLSA. The 2021 IC Rule identified five economic reality factors to guide the inquiry into a worker’s status as an employee or independent contractor. Under the 2021 IC Rule the factors of Degree of control over the work and the worker’s opportunity for profit or loss – were designated as “core factors” that were the most probative and carried greater weight in the analysis. The 2021 IC Rule stated that if these two core factors point towards the same classification, there is a substantial likelihood that it is the worker’s accurate classification.
However, the 2021 IC Rule was not formally added to the Code of Federal Regulations (CFR), because the DOL first delayed and then withdrew the 2021 IC Rule before it became effective. The DOL believed that the 2021 IC Rule included provisions that were in tension with the case law. The new provisions narrowed the economic reality test by limiting the facts that may be considered as part of the test, facts which the DOL believed were relevant in determining whether a worker is economically dependent on the employer for work or in business for themselves. However, a federal court decision later vacated the DOL’s efforts to delay and withdraw the 2021 IC Rule, and the DOL has, since that decision, conducted enforcement in accordance with the 2021 IC Rule.
The DOL has now decided to move forward with this proposed regulation in order to correct the 2021 IC Rule. Accordingly, the DOL is now proposing to rescind the 2021 IC Rule in relevant part, and proposes:
- Not using “core factors” in the analysis and instead returning to a totality-of-the-circumstances analysis of the economic reality test that has a refined focus on whether each factor shows the worker is economically dependent upon the employer for work versus being in business for themselves. The proposed regulations will not use predetermined weighting of factors, instead the factors will all be considered comprehensively.
- Returning the consideration of investment to a standalone factor. Focusing on whether the worker’s investment is capital or entrepreneurial in nature, and considering the worker’s investments on a relative basis with the employer’s investment.
- Providing additional analysis of the control factor, including detailed discussions of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the degree of control over a worker, and not limitinghttps://www.wcslaw.com/practice-areas/employment-labor-law/ control to control that is actually exerted.
- Returning to the longstanding Departmental interpretation of the integral factor, which considers whether the work is integral to the employer’s business rather than whether it is exclusively part of an “integrated unit of production.”
The DOL believes that “rescinding the 2021 IC Rule and replacing it with regulations addressing the multifactor economic reality test – in a way that both more fully reflects the case law and continues to be relevant to the evolving economy – would be helpful for both workers and employers.” The goal of the regulations is to help protect workers from misclassification while at the same time providing a consistent approach for those businesses that engage independent contractors.
The proposed rule could have the biggest impact on ride-hailing companies, delivery services and other industries that rely on so-called gig workers. Some believe that the proposed rules will mean that employers will have a harder time classifying workers as independent contractors. The National Retail Federation opposes the rule change, calling it unwarranted and unnecessary and stating “the changes being proposed by the Labor Department will significantly increase costs for businesses across all industries and further drive already-rampant inflation.” Employers and employees may comment on the proposal for 45 days after the published date.
If you have any questions regarding this matter, please contact any member of the Wright, Constable & Skeen Labor and Employment Practice Group.