A new proposed rule by the U.S. Department of Labor could make it more difficult to classify workers as independent contractors under the Fair Labor Standards Act. The new rule would replace the existing January 2021 rule which focuses on two factors — control over the work and opportunity for profit or loss — to determine a worker’s independent contractor status.
New “Totality of Circumstances” Standard
The new, more complicated proposed rule would encompass a “totality of the circumstances” standard. Six factors are used to guide the analysis of whether a worker is economically dependent on the employer or truly in business for oneself. The six factors used to evaluate the “totality of the circumstances” are:
(1) the “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,” including “whether the employer uses technological means of supervision (such as by means of a device or electronically), reserves the right to supervise or discipline workers, or places demands on workers’ time that do not allow them to work for others or work when they choose”;
(5) the “extent to which the work performed is an integral part of the employer’s business”; and (6) the “skill and initiative” of workers, referring to whether a worker uses specialized skills brought to the job or is “dependent on training the employer to perform the work.” Moreover, the proposed rule also states that “additional factors may be relevant” in the analysis.
In proposing the new rule, the DOL felt that the January 2021 rule, which was promulgated during the Trump presidency, made it easy for workers to qualify as independent contractors and did not comport with FLSA’s previous policies and decades of case law.
LawFlash, published by law firm Morgan Lewis, notes that the Proposed Rule is a significant departure from the 2021 Rule “insofar as
(1) the DOL seeks to move away from considering the exercise of control and the opportunity for profit and loss as the ‘core factors’ in the economic realities analysis;
(2) requiring compliance with legal or regulatory obligations could now be considered as part of the control factor;
(3) evidence of work performed for multiple companies will not be viewed as dispositive of independent contractor status; and
(4) only worker investments that are capital and entrepreneurial in nature will weigh in favor of an independent contractor finding. Those changes could have a significant impact on certain industries that rely on independent contractor business models.”
FLSA and State Laws
There are a couple of things to bear in mind though.
First, the Proposed Rule would apply only to the FLSA and not have any impact on state wage and hour laws that don’t follow the FLSA for determining a worker’s independent contractor status. For example, Lewis notes that “California, Massachusetts, and several other states apply an ‘ABC Test,’ (with some exceptions) under which a worker is considered an employee and not an independent contractor unless the hiring entity satisfies three conditions distinct from (but in some instances similar to) the factors in the Proposed Rule.”
Thus, regardless of DOL’s guidance on who qualifies as an independent contractor, employers should always review whether and how different state laws may apply to their workforce.
Final Rule Subject to Review
The other caveat is that the DOL’s proposed changes will not go into effect until it issues a Final Rule. Based on the comments it receives, the DOL may modify its position before publishing the Final Rule, which is likely to occur sometime in the first quarter of 2023.
Although the DOL will use the standard set forth in the Final Rule in its FLSA enforcement efforts, it is unclear how much deference courts will give to the new standard, particularly considering that the DOL’s view on what the proper standard is for determining independent contractor status keeps changing.
“Regardless,” says Lewis, “the issue of whether a worker qualifies as an independent contractor will likely remain the subject of frequent litigation under the FLSA and applicable state wage and hour laws. Thus, employers should continue to review how their workers are classified and consider whether to comment on the Proposed Rule so that the DOL recognizes the practical effect that the Final Rule may have on certain industries.”
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