The U.S. Department of Labor (DOL) issued a proposed new rule regarding employers’ classification of workers as employees or independent contractors. The proposed rule addresses independent contractor classification under the Fair Labor Standards Act (FLSA). The agency is unwinding rules that were changed during the prior administration in determining how to classify workers.
Specifically, the proposal would repeal the previous administration’s independent contractor regulation, which emphasized that two “core” factors – workers’ control over their work and their opportunity for profit or loss – were paramount in making an independent contractor determination. The proposed rule would reinstate a “totality-of-the-circumstances” analysis of the “economic reality test” that courts have historically used.
What does this mean? Workers are classified as independent contractors if they are in business for themselves. Otherwise, they are economically dependent on their employer and should be classified as employees, not independent contractors. Economic dependence is not predicated on the amount of income workers earn or whether they have other income streams.
The proposed ruling sets forth a six-factor test for determining whether a worker is “economically dependent” on an employer under the totality of the circumstances. These factors include:
- Opportunity for a profit or less, based on managerial skill.
- Investments by the employees and employer.
- Degree of permanence of the working relationship.
- Nature and degree of control.
- The extend in which the work performed is essential to the success of the employer’s business.
- Skill and initiative
The proposed rule also notes that additional factors may be relevant if they indicate whether the workers are in business for themselves, as opposed to being economically dependent on the employer for work.
The Effect of the Rule If Finalized?
Many workers – including workers who want to be independent contractors – may be reclassified as employees under the FLSA. This includes workers in the home health care industry. Home health care agencies may be held liable for complying with laws relating to FICA, health care, and retirement plans, as well as federal regulations that protect employees as a result of the DOL changes.
It’s important to note that the proposed rule addresses the classification of independent contractors under the FLSA only, not any other statute. Different and typically narrower tests are used to determine employee status under the Internal Revenue Code (taxes), the National Labor Relations Act, Title VII (discrimination), and common law, for example (for tort liability and other purposes).
The proposed rule also does not directly impact the classification of independent contractors for state employment laws. For example, the proposed rule has no direct impact on states that have implemented a California-style “ABC” test for worker classification.
However, most legal experts say that the proposed rule appears to tilt the playing field heavily toward employee status.
Interested parties have until November 28, 2022, to submit comments to the DOL on the proposed rule. If the DOL follows through on the final rule after the comment period, it will most likely be issued in late 2023 or early 2024.
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