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As most employers know, independent contractors are not subject to certain minimum wage, overtime, or recordkeeping requirements under the Fair Labor Standards Act (FLSA). But this month, the Department of Labor unveiled a new proposed rule that could make it more difficult for workers to be classified as independent contractors.

The Current Rule

The current rule on independent contractor status, adopted in January 2021, simplified the traditional multi-factor test by stressing that two “core” factors – a worker’s control over their work, and their opportunity for profit or loss – were paramount in making an independent contractor determination. Although courts could still consider three other factors when determining a worker’s status (e.g., skill required for the work, the degree of permanence of the working relationship between the individual and the potential employer, and whether the work is part of an integrated unit of production), the first two “core” factors would almost always be dispositive of an employee’s status.

The Proposed Rule

The new proposal would rescind and replace the January 2021 rule. Under the proposed rule, determining whether a worker is an employee or an independent contractor under the FLSA would focus on the economic realities of the worker's relationship with the employer and whether the worker is economically dependent on the employer. A worker would be classified as an independent contractor rather than an employee if the worker is, as a matter of economic reality, in business for themselves.

The proposed rule sets forth a six-factor test for determining whether a worker is “economically dependent” on an employer under the totality of the circumstances.

  1. Opportunity for profit or loss depending on managerial skill
    This factor focuses on whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work, examining things such as: whether the worker determines the pay for the work provided; whether the worker accepts or declines jobs; whether the worker engages in other efforts to expand their business or secure more work; or whether the worker makes decision to hire others, purchase materials and equipment, and/or rent space. If a worker has no opportunity for profit or loss, this factor suggests that the worker is an employee.
  2. The extent of the relative investments of the employer and the worker
    This factor considers whether the worker’s investment is capital or entrepreneurial in nature. For a worker’s investment to indicate independent contractor status, the investment must be capital or entrepreneurial in nature. A worker’s investment should generally support an independent business or serve a business-like function, such as increasing the worker’s ability to do different types of work, reducing costs, or extending market reach. The Department notes that costs borne by a worker to perform a job, such as tools and equipment, are not capital and entrepreneurial, and instead indicate employee status. A worker’s investment should be considered on a relative basis with the employer’s investment in its overall business.
  3. The degree of permanence of the work relationship
    This factor focuses on whether the work relationship is indefinite in duration or continuous. A worker is more likely to be classified as an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic.
  4. Nature and degree of control
    More control by the employer – setting the worker's schedule, supervising the performance of the work or explicitly limiting the worker’s ability to work for others – suggests employee status, whereas more control by the worker suggests independent contractor status. The Department notes that the analysis should focus on whether the employer retains control over “meaningful economical aspects of the work relationship such that the control indicates that the worker does not stand apart as their own business.” Companies cannot classify workers as independent contractors simply because they have scheduling flexibility or have flexible deadlines. Control implemented by the employer for purposes of complying with legal obligations, safety standards, or contractual or customer service standards may be indicative of control. 
  5. Whether the work performed by the worker is an “integral” part of the employer’s business
    This factor weighs in favor of employee status when the work performed is critical, necessary or central to the employer's principal business; and weighs in favor of independent contractor status when the work performed by the work is ancillary or incidental to the employer’s principal business.
  6. Skill and initiative
    This factor considers whether a worker uses specialized skills to perform the work, and whether those skills contribute to business-like initiative that is consistent with the worker being in business for themself instead of being economically dependent on the employer. This factor indicates employee status where the worker does not use specialized skills or the worker depends on training by the employer to perform the work. Consistent with the principle that no one factor is dispositive, however, workers who lack specialized skills may be independent contractors even if this factor is very unlikely to point in that direction in their circumstances.

No one factor is controlling, and additional factors may be considered if they are relevant to the ultimate question of whether workers are economically dependent on the employer for work, or instead are in business for themselves

The proposed rule is now subject to public comment until Monday, November 28, 2022. 

Key Takeaways for Employers

  • The proposed rule has parallels to California’s “ABC” test, which presumes that most workers are employees, not independent contractors, especially where they don’t perform “work that is outside the usual course of the hiring entity’s business.” Under the DOL’s proposed rule, it is likely to become much harder for businesses to classify ordinary workers as independent contractors.
  • The new rule does not affect how states determine who qualifies as an independent contractor. The rule also would not redefine who qualifies as an independent contractor under the Internal Revenue Code, the National Labor Relations Act, or other federal laws. Businesses will need to ensure that they are complying with all applicable laws when evaluating a worker’s status.
  • Businesses should consider evaluating the status of any independent contractor before the end of the year to make sure they are properly classified under the proposed rule. This will put businesses in the best position to avoid hefty penalties if the Department adopts the proposed rule and begins policing misclassification before the first quarter of 2023.