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On October 13, 2022, the United States Department of Labor (the “DOL”) published a new proposed rule to clarify who is an independent contractor under federal wage and hour law (the “Proposed Rule”). The Fair Labor Standards Act (FLSA) protects workers against unfair employment practices by requiring employers to provide certain benefits and protections to employees. Independent contractors are not employees under the FLSA. As such, employers that misclassify workers as independent contractors may wrongfully deny workers of benefits and protections under the FLSA and other laws.
The current independent contractor rule (the “Current Rule”) is a multi-factor test that focuses on two “core” factors – a worker’s control over their work and the opportunity for profit and loss. As previously reported here, the DOL attempted to withdraw the Current Rule in spring 2021. However, the withdrawal attempt was invalidated in March 2022 because the DOL did not follow certain procedural requirements. The Proposed Rule would revert back to the use of a longer non-exhaustive, multi-factor test for determining worker status, and would examine the following:
- The worker’s opportunity for profit or loss depending on managerial skill.
- The degree of investments (e., costs borne) by the worker and the employer.
- The degree of permanence of the working relationship.
- The nature and degree of employer control in the working relationship.
- The extent to which the work performed is an integral part of the employer’s business.
- The workers’ use of specialized skills and whether they contribute to a business-like initiative.
If the proposed rule is enacted, all factors will be analyzed under a totality of the circumstances test where each factor is fully considered.
Unlike the Current Rule, the Proposed Rule would consider a worker’s investment in a business as a standalone factor. Additionally, when analyzing the control factor, the Proposed Rule focuses on who controls scheduling, supervision, price-setting and whether the worker has the ability to work for others. Notably, the Proposed Rule also would change the interpretation of what is an “integral” part of a company’s business. Rather than focusing on whether a worker is integrated into the employer’s production process, the Proposed Rule would consider whether the work performed is an integral part of the business. If the work performed is critical, necessary, or central to the employer’s principal business, this factor supports a finding that the worker should be classified as an employee. Conversely, if the work performed is not critical, necessary, or central to the company’s principal business, the “integral” factor could support an independent contractor classification.
Interplay with Other Laws
The above notwithstanding, this Proposed Rule would only affect the analysis of an independent contractor as it pertains to the FLSA. Federal agencies such as the Internal Revenue Service, the National Labor Relations Board, and the Equal Employment Opportunity Commission apply their own test for determining a worker’s status. Similarly, many states have enacted state-specific tests for independent contractor classifications. For example, states such as California, Illinois, Nevada, Washington, and others apply the narrower ABC test to classify workers.
The Proposed Rule is subject to public comment until November 28, 2022. The DOL will review and consider those comments before the Proposed Rule is finalized. As the rules regarding independent contractor status continue to be in flux, careful consideration should be given before making any independent contractor classifications.
If you have questions about this or any other workforce issue, please do not hesitate to contact your relationship attorney or one of Honigman’s Labor & Employment attorneys.
Mahja D. Zeon is an attorney in the firm’s Labor and Employment department. She focuses her practice on employment counseling, litigation, and strategic workforce planning.
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