Employee or Independent Contractor? The U.S. Department of Labor Proposes Rule Change to the Independent Contractor Test

November 3, 2022 | by Ryan Cross, Associate in Washington Office of Wong Fleming

The U.S. Department of Labor’s proposed rule change would return applying a test that would make it more difficult for certain workers to qualify as independent contractors. The proposed rule change and information on submitting written comments can be found here.

On October 13, 2022 the U.S. Department of Labor published a Notice of Proposed Rulemaking aimed at helping employers and workers better determine and classify whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). According to the Notice, the U.S. Department of Labor (The Department) proposes modifying the Wage and Hour Division regulation to be more consistent with judicial precedent and the FLSA’s text.

This proposed change is the Biden administration’s renewed effort to amend the Trump-era rule, which imposed the multi-factor “economic realities” test. After assuming office, the Biden Administration delayed the Trump rule’s effective date before withdrawing the rule altogether. However, an Eastern District of Texas federal judge reinstated the rule on March 8, 2021. Now, the new rule proposed by the Biden Administration again seeks to eliminate the “economic reality test” and replace it with the “totality of the circumstances” analysis which The Department has long favored.

The economic reality test relies upon two core factors: the nature and degree of control over the work (i.e., whether the worker operates their own business) and the worker’s opportunity for profit or loss based on initiative and investment (i.e., whether the worker is economically dependent on the hiring entity).

Three other “non-core” factors, which are less probative, serve as guideposts in determining employment status: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production. The last factor contemplates whether the individual works under circumstances analogous to a production line. Under the Trump era rule, if the first two core factors supported the same classification, there is a “substantial likelihood” that the classification was correct. Here, the new framework proposed by the Biden administration conforms with the longstanding judicial precedent on which employers have relied to classify workers as either employees or independent contractors under the Fair Labor Standards Act.

The new rule seeks to restore the multi-factor, totality-of-the-circumstances analysis to determine whether a worker is classified as an employee or independent contractor under the FLSA. The new rule would eliminate the “core factors” in favor of a return to the totality of the circumstances approach in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.

Under the proposed rule, “all factors that may be relevant” in determining a worker’s classification include, but are not limited to, (1) the worker’s opportunity for profit or loss depending on managerial skill, (2) investments by the worker and the employer, (3) the degree of permanence of the working relationship, (4) the nature and degree of control the employer has over the worker, (5) the extent to which the work performed is an integral part of the employer’s business, and (6) the skill and initiative the worker needs to perform the work. Other factors may also be considered if they clarify whether the worker is economically dependent on the employer for work. The Biden administration justifies this approach as most beneficial for stakeholders because the proposal aligns with The Department’s decades-long policy and circuit case law.

According to acting Secretary of Labor Marty Walsh, “[M]isclassification of employees as independent contractors disproportionately affects the nation’s most vulnerable workers.” Most notably, this includes workers who delivered essential services during the COVID-19 pandemic. As a result of this misclassification, workers are deprived of their federal labor protections, including their right to be paid their full, legally earned wages.

The rule change will force some employers to reevaluate their workers’ statuses. In addition, employers may have independent contractors that would now be considered employees under the new rule.

The proposed rule change is open to written comments until November 28, 2022. The proposed rule change and information on submitting written comments can be found here. Don’t hesitate to contact Wong Fleming with any independent contractor-related questions. We will continue to track the progression of this proposed rule change and any resulting legislation, regulations and litigation.