On October 11, 2022, the DOL finally announced the publication of its proposed new rule. And what was old is new again. The proposed rule reverts back to an “economic reality test” for evaluating whether a worker is an independent contractor based on the “totality of the circumstances” of the worker/business relationship. It establishes a new 6-factor, equal weight approach for the test. Application of this Proposed Rule will fundamentally affect the relationship between many companies and the people who work for them.
The DOL claims that the Proposed Rule is necessary to “preserve essential worker rights” under the Fair Labor Standards Act (the “FLSA”). This is the federal law that requires employers to pay employees minimum wage, as well as overtime premium pay (1.5 times regular rate) for all hours worked over 40 in a workweek. The FLSA exempts certain types of employees from some of these protections, but the FLSA does not apply at all to independent contractors. That means, that workers who are properly classified as independent contractors do not have to be paid minimum wage or overtime pay. This is why the DOL standard for determining who is or is not an independent contractor is so important to employers.
In January 2021, during the prior administration, the DOL published its own version of the independent contractor rule. The 2021 Rule identified five (5) factors to guide whether a worker was an independent contractor. It further identified 2 of those factors – the nature and degree of control over the work and the worker’s opportunity for profit and loss – to serve as “core factors” that should be given greater weight in the analysis. On May 6, 2021, the DOL, led by a new administration, withdrew the 2021 Rule. A legal battle over the withdrawal followed. One federal court ruled that the current administration could not withdraw the 2021 Rule the way they did, which brings us to now, with the DOL proposing a brand-new rule (which looks much like the rule before the 2021 Rule). Confused yet? Here are the details:
The DOL’s new Proposed Rule establishes an “economic reality test”. In short, this stands for the principle that what matters in determining whether a worker is an independent control or employee is not how the worker is designated in a contract or otherwise expressed by the parties, but rather the economic reality concerning whether “the worker is economically dependent on the employer for work (i.e., an employee) or is in business for themself (an independent contractor). The Proposed Rule, unlike the 2021 Rule, looks at “totality of the circumstances” in applying the economic reality test. It uses a six-factor test for determining whether worker is “economically dependent” on the employer. These are the factors:
1) opportunity for profit or loss depending on managerial skill (whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work),
2) investment by the worker and the employer (whether there is investment by the worker that is capital or entrepreneurial in nature that increases the worker’s ability to do different types of or more work, reduce costs, extent marking work, thus suggesting the worker is in business for himself),
3) degree of permanencies of the work relationship (whether the work relationship is indefinite or definite or continuous in nature, non-exclusive, project-based, or sporadic);
4) the nature and degree of control over the worker (based on considerations like scheduling, supervision, setting a price or rate for goods or services, ability to work for others),
5) the extent to which the work performed is an integral part of the employer’s business (whether the worker provides the same type of services/goods as the hiring business), and
6) the skill and initiative of the worker (whether the worker uses specialized skills to perform the work and those skills contribute to business initiative consistent with the worker being in business for themself rather than economically dependent on the employer).
Unlike the 2021 Rule, no one factor is considered more probative in assessing the indinpent contactor relationship. Each of the factors holds equal weight. The new Proposed Rule also includes a “catch all” which provides that “additional factors” not listed may also be considered to determine whether, under the totality of the circumstances, a worker is an independent contractor or employee.
The repeated changes to the DOL’s independent contactor rule (and other administrative regulations) create significant uncertainty and confusion for businesses. Those who misclassify workers as independent contractors face the possibility of significant and costly litigation. They also risk civil penalties for misclassifying their workers as independent contractors.
Businesses who re-characterized workers as independent contractors either based on the 2021 Rule or in May 2022, when that rule was withdrawn, should re-assess whether their classifications would still hold up under the new Proposed Rule. If and when the Proposed Rule becomes final, it would transform some workers from independent contractors into employees. Businesses must therefore make efforts consider reclassifying their employees yet again. Business with an interest on the issue should also submit comments, pro- or con- by November 28, 2022. Comments can be submitted online. Lastly, business must continue to monitor developments in the law. Given the consequences, it is important to understand and comply with the changing law.