The U.S. Department of Labor (DOL) proposed a new rule on Sept. 22 that sets a uniform standard for classification of workers under the Fair Labor Standards Act (FLSA), effectively reframing the multifactor economic realities test, and provides other interpretive guidance. The DOL’s rules provide guidance and although not binding on the courts, can be instructive for judicial and administrative application of the FLSA (and other laws). The new proposed rule will undergo a 30-day review period, but the DOL is likely to expedite its implementation following the review period.

The economic realities test tweaked by the DOL under its proposed rule would use two “core” factors and three other factors. The core factors are (1) the nature and degree of the individual’s control over the work and (2) the individual’s opportunity for profit or loss. The other factors include: (3) the amount of skill required for the work, (4) the degree of permanence of the working relationship between the individual and the potential employer, and (5) whether the work is part of an integrated unit of production.

Separating these five factors into two tiers expressly departs from previous departmental and judicial interpretations. The core factors would control classification analyses because when these core factors point toward the same classification, “the bulk of the analysis is complete.”

Crucial to the analysis of the individual’s control over the work is another element of the proposed rule. Under the new rule, a court would place greater weight on actual practices than on contractual or theoretical possibilities. Thus, an individual’s theoretical ability to negotiate prices or work for competing businesses will be less meaningful if the hiring entity prevents the worker from exercising those rights. Similarly, a hiring entity’s right to supervise or discipline a worker is less relevant if the entity does not do so in practice.

In addition to making it easier to classify workers as independent contractors, the new rule also provides that employers can rely on the provision under the FLSA’s safe harbor provision to limit possible damages in an FLSA misclassification analysis.

This new rule builds on the DOL’s April 2019 guidance for gig-economy workers who would be connected to customers through the hiring entity. The April 2019 guidance enumerated a six-factor test. The DOL issued the new proposed rule last week to streamline the test and establish uniform analysis for all types of independent contractors.

The DOL’s new rule contains extensive explanation and context, possibly in response to the recent New York federal court decision that just struck down part of the DOL’s joint employer rule in part for its lack of explanation. The DOL’s compressed 30-day comment period suggests an intent to finalize this rule before the end of the year.

Employers who use independent contractors should monitor this rule and develop a strategy for complying with the modified rule. Regardless of the ultimate form the proposed rule takes, employers will need to remain mindful of developments in state law worker classification.