On 13 October 2022, the United States Department of Labor (DOL) published a notice of proposed rulemaking that would assist employers in classifying workers as employees or independent contractors under the Fair Labor Standards Act. The DOL believes that the new rule will be more consistent with longstanding judicial precedent on which employers have relied.
Earlier this year, the United States District Court for the Eastern District of Texas ruled that the Biden administration had violated the Administrative Procedure Act by attempting to rescind the Trump administration's Independent Contractor Status under the Fair Labor Standards Act rule (the 2021 independent contractor rule). For more information on this decision, see "Federal Court Reinstates Independent Contractor Rule".
The 2021 independent contractor rule identified five economic reality factors to determine whether a worker was an employee or independent contractor. The factors that carried the most weight in that analysis were the nature and degree of control over the work and the worker's opportunity for profit or loss. The 2021 independent contractor rule made it easier for businesses to classify workers as independent contractors.
The DOL is now proposing to rescind the 2021 independent contractor rule, eliminate the use of "core factors" and, instead, return to conducting a totality-of-the-circumstances analysis in which the economic reality factors are not assigned predetermined weight, and each factor is given full consideration.
The proposed rule, Employee or Independent Contractor Classification Under the Fair Labor Standards Act, would establish a multi-factor economic realities test. The factors are non-exhaustive, and no one factor is dispositive. The weight given to each factor will depend on the facts and circumstances of a particular case. The factors include the following:
- opportunity for profit or loss depending on managerial skill;
- investments by the worker and the employer;
- degree of permanence of the work relationship;
- nature and degree of control;
- extent to which the work performed is an integral part of the employer's business; and
- skill and initiative.
Additional factors may also be considered if they indicate whether the workers are in business for themselves.
Of particular note, the proposed rule:
- returns investment to a standalone factor;
- provides 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 analysing the degree of control over a worker); and
- returns to a traditional interpretation of the integral factor (which considers whether the work is integral to the employer's business).
The DOL's announcement may have a major impact on industries that rely heavily on contract workers, particularly the gig economy. Employers must continue to be mindful of state laws (eg, California, New Jersey and Massachusetts) that provide much more stringent tests to determine whether a worker is an independent contractor or an employee.
The public will have until 45 days after the proposed rule's publication in the Federal Register to submit comments.
For further information on this topic please contact Jeffrey Mokotoff or Alyce Ogunsola at FordHarrison ​by email ([email protected] or [email protected]). The FordHarrison website can be accessed at www.fordharrison.com