The United States Department of Labor has issued a proposed rule that will significantly impact worker classification under the Fair Labor Standards Act (FLSA). The proposal, released Tuesday, October 11, 2022, is a departure from the standard adopted during the Trump administration.
The FLSA generally requires covered employers to pay nonexempt employees at least the federal minimum wage for all hours worked and at least one and one-half times an employee’s regular rate of pay for every hour worked over 40 in a workweek. The FLSA also requires covered employers to maintain certain employee records and prohibits retaliation against employees who are discharged or discriminated against after engaging in protected activity, such as inquiring about their pay or filing a complaint with the DOL.
Independent contractors are not subject to the FLSA’s minimum wage, overtime, and other protections.
Under the Biden administration’s rule, the DOL will use a multi-factor “economic realities test” that considers the “totality of the circumstances” to determine whether someone is properly classified as an independent contractor. Unlike under the Trump standard, no single factor would carry more weight than others. The six factors under the Biden DOL’s proposal are:
- Degree of worker control over their job duties;
- Worker opportunity for profit or loss;
- Worker and employer investments;
- Degree of permanence of the working relationship;
- Extent to which the work performed is an integral part of the employer’s business; and
- Degree of skill and initiative a worker exhibits.
The DOL has explained how it will apply these factors.
Degree of worker control over their job duties. The DOL will consider the employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship.
This factor includes consideration of whether the employer sets the worker’s schedule, supervises the performance of the work, or explicitly limits the worker’s ability to work for others. Also relevant is evidence regarding whether the employer uses technological means of supervision, reserves the right to supervise or discipline workers, or restricts workers from working for others. The proposed rule also states that the DOL will assess employer control of the economic aspects of the working relationship, including control over prices or rates for services and the marketing of the services or products the worker provides, along with employer control of safety, contractual, and customer service standards. The assessment would not be limited to control that is actually exercised. The more control an employer has, the more likely this factor weighs toward employee status.
Worker opportunity for profit or loss. The DOL will consider whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work.
This factor involves assessment of whether a worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.
Under the proposed rule, if there is no opportunity for a profit or loss, the factor would suggest employee status. Worker decisions to work more hours or jobs is not indicative, according to the proposed rule, of managerial skill.
Worker and employer investments. This factor pertains to whether the worker’s investment is capital or entrepreneurial in nature, and the worker’s investments on a relative basis with the employer’s investment. Costs borne by a worker to perform their job (e.g., tools and equipment to perform specific jobs and the workers’ labor) are not, per the proposed rule, evidence of capital or entrepreneurial investment and indicate employee status. Investments that are capital or entrepreneurial in nature indicate independent contractor status.
Degree of permanence of the working relationship. Per the proposed rule, “[t]his factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration or continuous, which is often the case in exclusive working relationships.” This factor weighs in favor of independent contractor status when the work relationship is definite in duration, nonexclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities.
The extent to which the work performed is an integral part of the employer’s business. The DOL will consider whether the work is integral to the employer’s business rather than being exclusively part of an “integrated unit of production.” Under this factor, the DOL will assess whether the work performed is “critical, necessary, or central to the employer’s principal business.” If the work is not critical, necessary, or central to an employer’s principal business, the factor leans toward independent contractor status.
The degree of skill and initiative a worker exhibits. This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. Employee status is indicated if the worker does not use specialized skills in performing their work or where the worker is dependent on training from the employer to perform the work.
Under the rule, the DOL could also consider additional factors if those factors indicate that a worker may be in business for themselves. The DOL estimates that the rule change will cost affected employers, independent contractors, and local governments $188.3 million.
The proposed rule was published in the Federal Register on October 13, 2022, with a 45 day public comment period. As with President Biden’s prior attempt to rescind the Trump-era rule, expect litigation regarding the administration’s proposal.