Interested parties now have until December 13, 2022, to provide comments to the DOL’s proposed rule to codify a six-factor, economic reality test to determine who is an “independent contractor” under the Fair Labor Standards Act (“FLSA”), and thus not subject to minimum wage and overtime rules.
What does the DOL’s proposed rule change?
The DOL’s proposal would rescind a 2021 rule that primarily focused on two core factors—control over the work and opportunity for profit or loss—and considered to a lesser extent the amount of skill required for the work, degree of permanence of the working relationship, and whether the work was part of an integrated unit of production.
The proposed test calls for a totality-of-the-circumstances analysis considering the following factors:
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.
5. Extent to which the work performed is an integral part of the employer's business.
6. Skill and initiative.
The proposed test would not assign special weight to any individual factor, nor would the above factors be exhaustive. Additional factors that indicate whether the worker is in business for themselves (as opposed to being economically dependent on the employer for work) would also be relevant to the independent contractor analysis.
How can this impact my business?
If finalized, the changes could have a significant impact on certain industries—such as the gig economy—that rely on independent contractor business models by reducing the number of workers who can be treated as independent contractors. The DOL’s analysis widens the scope of policies that may evidence “employee status,” calling out policies requiring workers to comply with legal, safety, or regulatory obligations, and placing greater weight on situations when an entity other than the worker sets a price or rate for the goods or services offered by the worker.
Notably, the DOL’s test only applies to the FLSA, and it will have a limited impact on businesses operating in states with more stringent tests for classifying workers. For example, California primarily uses the “ABC test,” which presumes workers are employees instead of independent contractors unless the employer proves that the worker is free from the control and direction of the hiring entity; performs work that is outside the usual course of the hiring entity's business; and is customarily engaged in an independently established trade, occupation, or business. However, the rule reflects ongoing moves by federal authorities (including the National Labor Relations Board and U.S. Equal Employment Opportunity Commission) to extend federal worker protections to additional workers, while many state and local agencies are taking a similar approach.
How should my business respond?
Given increased enforcement focus on independent contractor classifications by federal and state authorities in recent years, it is important for any business that regularly utilizes independent contractors to continually evaluate these classifications and take steps to bolster their defensibility (e.g., by reviewing and revising written agreements, creating worker engagement and classification policies and procedures, and reviewing long-term contractor relationships).
The DOL’s 2021 rule will remain in place until a final rule is issued, likely in the first half of 2023. We will continue to monitor developments related to the DOL’s proposed rule and its impact on employers.