Employee or Independent Contractor: The Department of Labor Proposes a "New" Worker Classification Rule

On October 11, 2022, the U.S. Department of Labor (the DOL) announced a proposed rule to reestablish the pre-2021 analytic framework for assessing the classification of workers under the Fair Labor Standards Act (FLSA). The proposed rule replaces the employer-friendly test for worker classification adopted in 2021 with a "totality-of-the-circumstances" test previously used by courts. With this proposed rule, the DOL signals a shift back to a more expansive view of "employee." Employers who engage independent contractors should consider how this proposed rule could impact business operations.

Worker Classification Under the 2021 Rule

Under the FLSA, workers are classified as employees by default. Employees have the right to, among other things, minimum wage and overtime pay. Employers are not required to provide these things if they can show that a worker is an "independent contractor"; these workers are considered self-employed. Thus, whether a worker is treated as an employee or an independent contractor can have a large impact for both the worker and the business.

In January 2021, the DOL (under the waning Trump administration) published a five-factor "economic reality" test to guide the inquiry into a worker's status as either an employee or independent contractor under the FLSA (the "2021 Rule"). The DOL designated two of these five factors as "core factors" carrying the greatest weight: (1) the nature and degree of control over the work and (2) the worker's opportunity for profit or loss. Indeed, within the text of the 2021 Rule itself, the DOL noted that if these two core factors point toward the same classification, there is a substantial likelihood that is the worker's accurate classification.

Worker Classification Under the Proposed Rule

Since the Biden administration took office, the DOL has attempted to delay and repeal the 2021 Rule, though these actions were met with legal challenges. The October 11, 2022, announcement proposed formally rescinding and replacing the 2021 Rule through the notice and comment rulemaking process, and published a new proposed rule in the Federal Register on October 13, 2022.

Under the "new" rule, the DOL would largely return to the test that existed prior to the 2021 Rule: a totality-of-the-circumstances assessment traditionally used by courts, which highlights six factors intended to guide the analysis of whether the economic reality of the working relationship reveals workers to be economically dependent on the employer for work (i.e., employees) or in business for themselves (i.e., independent contractors). These factors include:

1. Opportunity for profit or loss, depending on managerial skill. This factor considers, for example, whether the worker can negotiate the pay received for the work provided; accept or decline jobs; engage in marketing or other efforts to secure more work; and hire others, purchase materials, and/or rent or buy space. If a worker experiences such profit or loss, then the worker is more likely to be an independent contractor.
2. Investments by the worker and employer. This factor looks at whether the worker's investments support an independent business. If a worker makes capital or entrepreneurial investments, then the worker is more likely to be an independent contractor.
3. Degree of permanence of the work relationship. In evaluating this factor, the DOL may consider whether the work relationship is for a definite duration, nonexclusive, and project-based. If there is a lack of permanence to the working relationship, then the worker is more likely to be an independent contractor. If the relationship is indefinite and ongoing, the worker is more likely to be an employee.
4. Nature and degree of control. Under this factor, if the employer sets the worker's hours and work location, and chooses the methods and tools used for performing the work, the worker is more likely to be an employee. If the employer exercises less control over the worker, then the worker is more likely to be an independent contractor.
5. Extent to which the work performed is an integral part of the employer's business. If the function performed by the worker is critical to or necessary for the operation of the employer's business, the worker is more likely to be an employee based on this factor. If the work performed is not central to the employer's business, then the worker is more likely to be an independent contractor.
6. Skill and initiative. If the worker has specialized or technical skills or training that was not obtained through the employer, then the worker is more likely to be an independent contractor.

Unlike the 2021 Rule, under this proposed rule no factor receives a predetermined amount of weight. Instead, all factors are given full consideration in evaluating the economic reality of the relationship as a whole. In fact, the DOL specifies that additional factors may be relevant in determining worker classification to ensure the totality of the circumstances are considered.

Takeaways for Employers

The proposed rule would make independent contractor determinations under the FLSA more complex, and under the proposed rule more workers are likely to be classified as employees. Thus, employers may want to evaluate their business operations, including the role played by independent contractors. For instance, employers may consider reexamining workers currently classified as independent contractors under the new rule's framework to determine whether the proposed rule would tip the scale for the worker's classification.

Notably, the proposed rule addresses worker classification only under the FLSA and not any other federal or state law. Other agencies, such as the Internal Revenue Service (IRS) and the National Labor Relations Board (NLRB), have their own separate tests for determining whether an employee is an independent contractor or employee under their respective bodies of law. State laws may also regulate how a worker can be classified. Thus, employers should continue to assess worker classification in relation to all relevant laws that may impact their engagement with any particular worker.

The proposed rule was originally open for public comment until November 28, 2022; amid complaints, the DOL has recently extended the comment period until December 13, 2022.

Employers with questions regarding worker classification under the FLSA or other applicable law are invited to contact the authors of this article or any other attorney in Venable's Labor and Employment Group.