DOL Announces A New Independent Contractor RuleNov 23, 2022
Once again, the Department of Labor (DOL) wants to change how it defines independent contractors under the Fair Labor Standards Act (FLSA). For employers who consider independent contractors an essential part of their workforce, the new proposed rule announced on October 13, 2022, could impact some workers’ “independent” status.
Businesses across the country — particularly construction, trucking, and the entire “gig economy” (i.e., Uber, Lyft, and freelancers everywhere) — have made it a practice to classify many workers as independent contractors. Businesses can be more competitive when not strictly adhering to the FLSA requirements for workers’ compensation, unemployment insurance, and other regulations applying to employees.
Due to the high interest and response, the 45-day comment period, scheduled to end on November 28, 2022, has been extended to December 13, 2022. You can make your comments at regulations.gov. All comments submitted become public record and will be posted without change, including personal information, to regulations.gov.
What’s the rule now?
The current rule, adopted in January 2021, simplified the traditional multifactor test to determine a worker’s independent status and focused on two key issues: A worker’s control over their work, and their opportunity for profit and loss. While the current rule states that the courts can consider other factors in determining a worker’s status, the 2021 Independent Contractor Rule made “control” and “profit and loss” primary considerations.
The DOL believes the current rule has a “confusing and disruptive effect on workers and businesses alike due to its departure from case law describing and applying the multifactor economic reality test as a totality of the circumstances.”
What’s the new rule?
If adopted in 2023, the new rule represents a shift to the six-factor economic reality test. The test outlined in the new rule is similar to California’s “ABC” test, which presumes that most workers are employees, especially when they don’t perform “work that is outside the usual course of the hiring entity’s business.”
The components of the DOL’s “totality-of-the-circumstances” analysis to determine a worker’s status are as follows:
Opportunity for Profit or Loss Depending on Managerial Skill (Proposed § 795.110(b)(1))— Does the worker exercise managerial skill that affects that worker’s economic success or failure in performing the work? Does the worker determine compensation? Does the worker accept or decline jobs?
Investments by the Worker and the Employer (Proposed § 795.110(b)(2)) — Is the worker’s investment in capital? Is it entrepreneurial? What is the investment of the worker relative to the employer?
Degree of Permanence of the Work Relationship (Proposed § 795.110(b)(3)) — Is the work relationship sporadic? Is it specific or indefinite in duration?
Nature and Degree of Control (Proposed § 795.110(b)(4)) — Does the employer control the performance of the work? Who sets the workers’ schedule? Who supervises? Does the employer limit the worker’s ability to work for others?
Extent to Which the Work Performed is an Integral Part of the Employer’s Business (Proposed § 795.110(b)(5)) — Is the work critical, necessary, or central to the employer’s principal business?
Skill and Initiative (Proposed § 795.110(b)(6)) — Does the worker use “specialized skills” in performing the work? Does applying those skills indicate initiative consistent with the worker having an independent business, or is the worker economically dependent upon the employer? Does the worker depend upon the employer for training?
The DOL stresses that this approach is based upon decades of court decisions and that no one factor carries more weight than another. The DOL also says that additional factors may be considered to determine if the worker is economically dependent on the employer for work and help the government evaluate “modern work arrangements” and how the courts have defined and classified workers.
It’s important to note that the new rule does not affect how states define an independent contractor. Nor does the new rule affect the definition of independent contractor under the Internal Revenue Code, the National Labor Relations Act, or other federal laws.
What should employers do?
It’s highly recommended that employers audit their existing independent contractor and employee classifications before the rule’s anticipated adoption in 2023 and evaluate compliance under the revised test.
Don’t hesitate to contact Orr & Reno if you have questions or concerns.
About the Author: James Laboe