Department of Labor Publishes Proposed Rule on Contractor-Employee Misclassification
Updated: Oct 21, 2022
On October 13, 2022 the U.S. Department of Labor (DOL) published a Proposed Rule to modify the Fair Labor Standards Act (FLSA) test used to determine whether a worker is an independent contractor or an employee. The DOL’s Press Release states that the new Rule would provide guidance on classifying workers, and seek to combat employee misclassification. The Proposed Rule would rescind the Trump-era Rule and signals a return to longstanding court precedent which includes the broader “totality of the circumstances” of the economic realities analysis. The DOL’s October 11, 2022 Press Release can be viewed here: https://www.dol.gov/newsroom/releases/WHD/WHD20221011-0
The FLSA’s minimum wage, overtime and recordkeeping protections apply to employees, not to independent contractors. When workers are misclassified as independent contractors, they are denied these rights and protections. The DOL states that misclassification of workers continues to be an issue of concern, as it “promotes wage theft, allows certain employers to gain an unfair advantage over other law-abiding businesses, and hurts the economy at large.”
The current Rule became effective on January 21, 2021 at the tail end of the Trump administration. The Biden Administration quickly attempted a stay and withdrawal of the 2021 Rule, but court challenges required the process to proceed through more formal rulemaking procedures, providing “Notice and Comment” to the public. The current Trump-era Rule emphasizes two core factors in determining when a worker is an employee or an independent contractor – looking at the worker’s degree of control over their work, and the worker’s opportunity for profit or loss depending on managerial control over the work. The DOL believes that consideration of these two factors alone “departs from decades of case law applying the economic realities test, as it “limits the facts that may be considered as part of the test.”
The Proposed Rule would restore the multi-factor “totality of the circumstances” analysis which includes a six-factor test to determine whether a worker is “economically dependent” on an employer for work. These factors are designed to reflect the true “economic realities” of the relationship, and include:
The opportunity for profit or loss depending on managerial skill;
Investments made by the worker and the employer;
The degree of permanence of the work relationship;
The nature and degree of control over the working relationship;
The extent to which the work performed is an integral part of the employer’s business; and
The skill and initiative of the worker in performing the work.
Both the current and Proposed Rule permit additional factors to be used if applicable to the economic realities of the relationship. The DOL urges that the enumerated factors are “not to be applied mechanically, but should be viewed along with any other relevant facts in light of whether they indicate economic dependence or independence.” The economic reality is what matters, and not labels or formalities.
Interested parties may submit comments to the DOL on the Proposed Rule until November 28, 2022. Please contact the law firm for assistance with preparing comments, or for more information.