Key Takeaways:
- On October 11, 2022, the United States Department of Labor (DOL) released a proposed rule concerning the test used to determine whether a worker is an employee or an independent contractor under federal wage and hour law.
- The DOL’s proposal adopts a multifactor economic realities test that would look to the totality of the circumstances of the relationship between the worker and employer.
- The proposed rule will be published in the Federal Register on October 13, 2022, and the public will have 45 days to comment.
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On October 11, 2022, the United States Department of Labor (DOL) released a proposed rule setting forth a new test for determining whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The new rule would make it more likely that a worker would be classified as an employee rather than an independent contractor than under the less strict Trump-era rule that preceded it.
Under the Trump-era rule, five economic reality factors guide the inquiry into a worker’s status as an employee or independent contractor. However, two of the five factors – the nature and degree of control over the work and the worker’s opportunity for profit or loss – are considered core factors that carry the most weight in the analysis. The other factors include the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the employer, and whether the worker is integrated in the employer’s production processes. The rule was widely viewed as an employer-friendly standard that would permit more workers to be classified as independent contractors.
Under the DOL’s new proposed rule, a worker’s economic dependence on an employer would be the ultimate inquiry for determining whether a worker is an independent contractor or an employee. Economic dependence does not focus on the amount the worker earns or whether the worker has other sources of income. Instead, it focuses on whether workers are in business for themselves.
Under the proposed rule, a multifactor economic realities test would be used to determine whether a worker is economically dependent on an employer. This totality-of-the-circumstances test would consider the following non-exhaustive factors, none of which are dispositive:
(1) Opportunity for profit or loss depending on managerial skill. This factor would consider whether the worker exercises managerial skill that affects the worker’s economic success or failure. For example, if a worker determines or can meaningfully negotiate the charge or pay for the work provided, or if a worker engages in marketing, advertising, or other efforts to expand their business or secure more work, then this factor would suggest that the worker is an independent contractor. If a worker has no opportunity for a profit or loss, then this factor would suggest that the worker is an employee.
(2) Investments by the worker and the employer. This factor would consider whether any investments by a worker are capital or entrepreneurial in nature. Investments that are capital or entrepreneurial in nature and thus would indicate independent contractor status must generally support an independent business and serve a business-like function. Costs borne by a worker to perform their job, such as the purchase of tools and equipment, would not constitute evidence of capital or entrepreneurial investment and would instead indicate employee status.
(3) Degree of permanence of the work relationship. This factor would weigh in favor of the worker being an employee when the work relationship is indefinite in duration or continuous. This factor would weigh in favor of the worker being an independent contractor when the work relationship is definite in duration, nonexclusive, project-based, or sporadic.
(4) Nature and degree of control. This factor would consider the employer’s control over the performance of the work and the economic aspects of the working relationship. More indicia of control by the employer would favor employee status; more indicia of control by the worker would favor independent contractor status.
(5) Extent to which the work performed is an integral part of the employer’s business. This factor would consider whether the function performed by the worker is an integral part of the employer’s business. Where the work performed is critical, necessary, or central to the employer’s principal business, this factor would weigh in favor of the worker being an employee. Where the work performed is not critical, necessary, or central to the employer’s principal business, this factor would weigh in favor of the worker being an independent contractor.
(6) Skill and initiative. This factor would consider whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. Where the worker does not use specialized skills in performing the work or is dependent on training from the employer to perform the work, this factor would weigh in favor of the worker being an employee. Where the worker does bring specialized skills to the work relationship and uses those specialized skills in connection with business-like initiative, this factor would weigh in favor of the worker being an independent contractor.
The proposed rule will be published in the Federal Register on October 13, 2022, and the public will have 45 days to comment. While the rule is currently pending, employers would be wise to begin assessing whether their worker classifications comport with the new rule, or risk liability for misclassifying employees under federal wage and hour law if the new rule is ultimately adopted. However, it is important to note that, regardless of what rule the DOL adopts, employers still must comply with state laws that are stricter on the issue of independent contractor misclassification, such as Massachusetts’ independent contractor statute.
