DOL Proposes New Rule to Clarify the Distinction Between an Employee and an Independent Contractor
By: Julie Solis-Alvarado
On October 13, 2022, the U.S. Department of Labor (“DOL”) officially published a new Proposed Rule addressing independent-contractor classification under the federal Fair Labor Standards Act (“FLSA”). The FLSA establishes minimum wage, overtime pay, and recordkeeping standards affecting employees in the private and public sectors. Because independent contractors are not considered “employees”, they are not entitled to such benefits. According to the DOL, the purpose of the Proposed Rule is to serve as a practical guide for employers and employees to understand to whom the FLSA applies and to prevent the misclassification of employees.
The Proposed Rule would rescind the 2021 employer-friendly rule which determines the status of independent contractors based on two core factors–1) the alleged employer’s control over the work and 2) the worker’s opportunity for profit or loss. Under the Proposed Rule, employers would revert to using a totality-of-the-circumstances analysis to determine which of the two categories a worker fits. Specifically, the Proposed Rule sets forth six non-weighted factors to consider when determining whether a worker is an employee or an independent contractor:
- Opportunity for profit or loss depending on managerial skill. If a worker can set or negotiate their pay, accept or decline jobs, choose the time and order to perform jobs, advertise its business, and hire others, the worker is more likely to be an independent contractor. This factor observes that the risk of loss must be based on the worker’s managerial decisions. Thus, workers who incur little to no costs or expenses, provide only their labor, and/or are paid an hourly or flat rate are unlikely to experience loss and thus unlikely to fall under independent contractor status.
- Investment by the worker and employer. A worker is more likely to be considered an independent contractor if the worker bears investments that increase the worker’s ability to do different types of work or more work, reduce costs, or extend market reach. In contrast, costs borne by a worker simply to perform their job (for example, tools and equipment to perform a specific job) are not evidence of capital or entrepreneurial investment. In addition, this factor provides that the worker’s investments should be evaluated on a relative basis with the employer’s investments.
- Degree of permanence of the work relationship. This factor weighs in favor of a worker being an independent contractor where the work relationship is definite in duration, project-based, nonexclusive or sporadic. However, a sporadic work relationship due to the temporary or seasonal nature of the job does not indicate independent contractor status. Similarly, if the work is indefinite in duration or continuous, then the worker is likely an employee.
- Nature and degree of control. This factor focuses on whether the employer retains control over meaningful economic aspects of the work relationship. The Proposed Rule not only considers the traditional indicia of control such as control over scheduling, supervision, price, or ability to work for others, but also considers control that is merely reserved but not exercised as “control.” Additionally, any control exercised to ensure compliance with legal obligations, safety standards, or contractual or customer service standards is indicative of employee status.
- Extent to which the work performed is an integral part of the employer’s business. This factor addresses whether the worker’s performance of work is an “integral part” of the employer’s business. If the worker’s performance of work is “critical, necessary, or central to the employer’s principal business” then this factor weighs in favor of employee status. Whereas a worker that performs work that is more peripheral to the employer’s business is more likely to be an independent contractor.
- Skill and initiative. While a worker’s lack of specialized skill to perform the work indicates that the worker is an employee, a worker that is highly skilled in a particular field is not automatically assumed an independent contractor. Rather, the DOL looks to whether the worker’s skills are used in “an independent way” and in connection with “business-like initiative.”
Overall, the Proposed Rule favors a pro-employee classification of workers and makes it more difficult for certain workers to qualify as independent contractors. The Proposed Rule however only applies to the FLSA. Therefore, it would have no impact on any state wage and hour laws that do not follow the FLSA. Regardless, employers should always review whether and how different federal and state laws may apply to their workforce. If the Proposed Rule were to be adopted, this could have a significant impact on businesses that rely on gig workers and other service industries.
Interested parties have until November 27, 2022, to submit their written comments and concerns to the DOL regarding the Proposed Rule. The DOL will review the comments before issuing a Final Rule. Until then, the 2021 Independent Contractor Rule remains in effect. Employers should continue to review how their workers are classified and consider whether to comment on the Proposed Rule.
For more information or if you have questions on how the DOL’s Proposed Rule may affect your business or employees, reach your BrownWinick Employment and Labor attorney, or contact Julie Solis-Alvarado.
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