On October 13, the Department of Labor (DOL) published a proposed rule changing the way employee or independent contractor status under the Fair Labor Standards Act (FLSA) is determined. The proposed rule would make it harder to classify a worker as an independent contractor instead of an employee. The classification of a worker as either an employee or an independent contractor is significant because the FLSA's minimum wage, overtime and recordkeeping obligations apply only to employees, not to independent contractors. The consequences of misclassifying employees as independent contractors can include liability for failure to pay minimum wage and overtime and possible criminal penalties, in addition to other penalties under state wage laws.
The proposed rule would rescind the previous independent contractor rule, which was adopted in January 2021, near the end of the Trump administration. That rule uses a five-factor test to determine whether a worker is properly classified as an employee or an independent contractor, with two of those factors considered "core factors" that receive more weight than the others. The core factors are the nature and degree of the worker's control over the work and the worker's opportunity for profit or loss. The three other factors are the amount of skill required for the work, the degree of permanence of the working relationship between the individual and the potential employer, and whether the work is part of an integrated unit of production. If the two core factors point in the same direction, it is unlikely the other factors would outweigh them.
With the change of administrations, the Biden administration initially stayed the enforcement of the January 2021 independent contractor rule, then withdrew it. A court later found the withdrawal to be ineffective under the Administrative Procedure Act and reinstated the rule. The new proposal would rescind and replace the January 2021 rule.
The proposed rule is generally in line with the standard that courts used to determine employee status under the FLSA before 2021. Under the proposed rule, determining whether a worker is an employee or an independent contractor under the FLSA would focus on the economic realities of the worker's relationship with the employer and whether the worker is economically dependent on the employer. A worker would be classified as an independent contractor rather than an employee if the worker is, as a matter of economic reality, in business for themself. Economic dependence does not focus on the amount of income earned or whether the worker has other income streams.
Whether a worker is economically dependent on an employer is based on the totality of the circumstances. Relevant factors include:
None of the above factors is dispositive, and none necessarily receives more weight than the others. Additional factors also may be relevant if they indicate whether the worker is in business for themself as opposed to being economically dependent on the employer for work. The DOL describes this multifactor economic reality test as offering a flexible, comprehensive and nuanced approach that can be adapted to disparate industries and occupations.
The proposed rule's totality-of-the-circumstances test likely will make it more difficult for a worker to qualify as an independent contractor rather than an employee. Both under the current rule and under the proposed rule, if it becomes final, it is important for employers to examine all aspects of the relationship to make sure that workers are classified correctly. While the proposed rule is not yet final and may still change, employers may want to begin thinking about how it would affect their worker classifications. Employers should also remember that they must comply with any applicable state wage laws, which could impose additional penalties if they are violated. (For example, New Jersey's misclassification law is discussed here.)
The DOL is soliciting comments regarding the proposed rule, which must be submitted on or before November 28. Comments may be submitted online or in writing to the Division of Regulations, Legislation and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Ave. NW, Washington, DC 20210.
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