U.S. Department of Labor Set to Publish Highly Anticipated Proposed Rule on Independent Contractors

The U.S. Department of Labor (Department) plans to publish a proposed rule tomorrow, which is expected to reduce the number of workers who qualify as independent contractors under the Fair Labor Standards Act (FLSA).

The proposed rule establishes a nonexhaustive six-factor “economic realities” test for determining whether a worker is an employee or independent contractor. The test focuses on the economic realities of the workers’ relationship with the employer and whether the workers are economically dependent on the employer for work or in business for themselves. It rescinds and replaces a Trump administration rule that provided a narrower standard for assessing worker classification, making it easier for workers to be independent contractors.

“Economic Realities” Standard Under New Proposed Rule

According to the Department, the proposed rule is intended to align with existing judicial precedent and the Department’s longstanding guidance prior to 2021. The Department explained in its proposed rule that for more than seven decades, the Department and courts have applied an “economic reality test” to determine whether a worker is an employee or independent contractor under the FLSA. It further stated that historically, the courts and Department have conducted a totality-of-the-circumstances analysis, considering multiple factors to determine a worker’s appropriate classification. To explain the recently announced rule’s departure from the Trump-era rule, the Department stated that the earlier rule “does not fully comport with the FLSA’s text and purpose as interpreted by the courts and will have a confusing and disruptive effect on workers and businesses alike due to its departure from decades of case law describing and applying the multifactor economic reality test.”

Under the proposed rule, the Department proposes a return to a totality-of-the-circumstances analysis of the economic reality test that assesses whether each factor shows the worker is “economically dependent” upon the employer for work rather than being in business for themself. Specifically, the six, non-exhaustive factors that constitute the economic reality test are

1. 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
5. extent to which the work performed is an integral part of the employer’s business
6. skill and initiative

A departure from the Trump-era rule’s prioritization of “core factors,” the factors should be reviewed comprehensively and none weighed more than the other. Additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA if the factors in some way indicate whether the worker is in business for themself as opposed to being economically dependent on the employer for work.

The proposed rule provides other modifications to the Trump-era rule. Whereas the prior rule limited consideration of investment and initiative to the “opportunity for profit or loss” factor, the proposed rule makes consideration of investment a standalone factor, focusing on whether the worker’s investment is capital or entrepreneurial in nature and considering the worker’s investments on a relative basis with the employer’s investment. The proposed rule also provides additional analysis of the control factor, including detailed discussions of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the degree of control over a worker and not limiting control to control that is actually exerted. Furthermore, the proposed rule returns to the longstanding Departmental interpretation of the integral factor, which considers whether the work is integral to the employer’s business rather than whether it is exclusively part of an “integrated unit of production.”

A Bit of History: Proposed Rule Would Undo Trump-Era Independent Contractor Standard

The previous, narrower independent contractor rule used a five-factor revised “economic reality” test with two “core factors”: (i) the nature and degree of the worker’s control over the work and (ii) the worker’s opportunity for profit or loss. Under this rule, if these two core factors pointed toward the same classification, there would be a substantial likelihood that this classification was the worker’s accurate classification, and it would be “highly unlikely” that other noncore factors could outweigh the combined probative value of the two core factors. The prior rule made it easier for employers — including those that tend to rely on gig economy workers (like ride-hailing and food delivery businesses) — to legally classify workers as independent contractors for federal wage and hour purposes. It also was a departure from the Department’s earlier economic realities test, evaluated under a totality of the circumstances, to consider whether a worker was an independent contractor or employee.

This Trump-era rule, however, did not immediately take off. Shortly after the change in administration, on March 4, 2021, the Department delayed the effective date of the independent contractor rule. On May 6, 2021, it withdrew the rule as inconsistent with the FLSA’s text and purpose. At that point, and because the Department did not replace the former, Trump-era rule with a new interpretation, the “traditional” economic realities test established by judicial precedent returned as the governing standard. We discussed the return to this standard here.

Creating even more confusion over the appropriate standard, litigation ensued over the 2021 independent contractor rule. On March 14, 2022, a federal district court in the Eastern District of Texas vacated the Department’s attempt to delay and then withdraw the Trump-era independent contractor rule. The district court held that it took effect as of its original effective date, March 8, 2021, and remained in effect.

On June 3, 2022, after the Trump-era rule was reinstated, the Department announced that it was developing a proposed rule on assessing employee versus independent contractor status under the FLSA. It also held public forums later that month to hear perspectives from workers and employers impacted by issues involving the classification of employees or independent contractors. The instant proposed rule on worker classification follows this unsettled path.

Impact of Proposed Rule on Employers

Once the proposed rule is published in the Federal Register, the public will have 45 days, through November 28, 2022, to comment. Hopefully, this much-anticipated proposed rule will provide some guidance to businesses as to how the Department would analyze whether a worker is an employee or independent contractor for purposes of determining federal overtime, minimum wage, and recordkeeping obligations under the FLSA. However, even under this proposal, the standards for worker classification still are fact-specific, the risks of misclassification are significant, and appropriate classification can be difficult to determine. In anticipation of the proposed rule being finalized, employers are encouraged to work with counsel to carefully analyze whether its current workers are properly classified as employees or independent contractors under the proposed standard and to make any necessary modifications to ensure compliance.