On October 11, 2022, the U.S. Department of Labor (DOL) unveiled a new proposed rule that could make it more difficult for workers to be classified as independent contractors under the Fair Labor Standards Act (FLSA). The proposed rule, which would rescind and replace a prior rule published in January 2021, would shift the analysis of whether a worker is an employee of a business for purposes of the FLSA from a more streamlined “economic reality” test to a more complex “totality-of-the-circumstances” standard.

Worker classification under the FLSA is significant, as independent contractors are not subject to the minimum wage and overtime requirements of the FLSA. While independent contractors are a key component of the economy, courts and the DOL have often been inconsistent in determining how to classify workers.

The 2021 rule’s “economic reality” test focuses on whether workers are economically dependent on an employer or are in business for themselves. That rule pointed to a list of nonexhaustive factors to be considered, but had sought to streamline the analysis by focusing on two “core factors”: (1) “the nature and degree” of control over the work; and (2) “the worker’s opportunity for profit or loss.”

In its notice of proposed rulemaking (NPRM), which is set to be officially published on October 13, 2022, the DOL stated that the new proposed rule would do away with prioritizing certain factors and instead focus on the multifactor economic reality “where no one factor or set of factors is presumed to carry more weight.” According to the DOL, such a test will be more helpful in “evaluating modern work arrangements” and align more closely with courts’ interpretations of the FLSA.

The new proposed rule highlights six factors to guide the analysis of whether the “economic realities of the working relationship” reveal a worker to be economically dependent on the employer for work or in business for him or herself based on a “totality-of-the-circumstances”: (1) the “opportunity for profit or loss depending on managerial skill”; (2) “investments by the worker and the employer”; (3) “degree of permanence of the work relationship”; (4) “nature and degree of control,” including “whether the employer uses technological means of supervision (such as by means of a device or electronically), reserves the right to supervise or discipline workers, or places demands on workers’ time that do not allow them to work for others or work when they choose”; (5) the “extent to which the work performed is an integral part of the employer’s business”; and (6) the “skill and initiative” of workers, referring to whether a worker uses specialized skills brought to the job or is “dependent on training form the employer to perform the work.” However, the proposed rule also states that “additional factors may be relevant” in the analysis.

Once the NPRM is published in the Federal Register, there will be a 45-day period for the submission of comments, which is set to close on November 28, 2022.

Key Takeaways

The issue of whether individuals should be classified as independent contractors has taken on increased significance as a result of the gig economy. It also has been a subject of political polarization, as reflected by the shifts in position taken by the Obama administration, the Trump administration, and the Biden administration, as well as by the varying tests that different states use to evaluate independent contractor status under a variety of laws.

The DOL states that it recognizes the important role independent contractors and small businesses play in the economy, but it also admits that the proposed rule is meant to “reduce the risk that employees are misclassified as independent contractors.” Classifying more workers as independent contractors could be disruptive to the many companies across the United States that depend on the use of independent contractors.

Although this new proposal is not a final rule, companies may want to consider how the proposal could impact their operations if the final rule that is adopted by the DOL is the same or highly similar to the proposed rule.