The U.S. Department of Labor (DOL) recently issued a proposed rule to clarify the test for independent contractor status and bring it more in line with the intent and purpose of the Fair Labor Standards Act (FLSA) and decades of case law applying the economic realities test.
The Biden Administration rule proposes a return to a totality-of-the-circumstances analysis that takes into consideration factors that include, but are not limited to, the following:
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The degree of control by the employer over the worker
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Whether the worker works exclusively for the employer
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The degree of permanence in the working relationship
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The worker’s investment in the equipment or materials required to accomplish the task
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The worker’s opportunity for profit or loss
It is a balancing test, and no one factor is given more weight than any other.
In contrast, the 2021 Trump Administration rule, currently in effect, uses a five-part multi-factor test that gives greater weight to two “core factors”: the degree of control that workers have over their job duties and whether the worker has the opportunity for profit and loss. If these two core factors point toward independent contractor status, they will not be outweighed by the remaining three non-core factors: the amount of skill required for the work, the permanence of the relationship, and whether the work is part of an integrated unit of production. The proposed rule rescinds this 2021 rule.
The proposed rule is more stringent than the 2021 rule and would likely result in fewer workers being classified as independent contractors rather than employees. This is important because most federal and state employment laws apply only to an organization’s employees, not the independent contractors they hire. For example, the FLSA imposes minimum wage and overtime pay rules for employees but not independent contractors.
In support of the proposed rule, Secretary of Labor Martin J. Walsh stated the following, according to a DOL news release: “While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers. Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages.”
If the new rule is adopted, it could significantly affect businesses that depend on gig workers, such as ride-hailing companies and food delivery services. According to a New York Times article, Lyft and Uber have asserted in federal filings that having to treat drivers as employees could force them to change their business models. However, CR Wooters, Uber’s head of federal affairs, also recognized that the proposed rule “takes a measured approach, essentially returning us to the Obama era, during which our industry grew exponentially,” according to a statement published by numerous national media outlets.
The proposed rule was officially published in the Federal Register on October 13, 2022. There will be a 45-day public comment period before a final rule goes into effect. If you have questions, please email the Employers Council Member Experience Team.