U.S. Department of Labor Aims to Revise Independent Contractor Rule and Curtail Employee Misclassification

The U.S. Department of Labor (DOL) recently published its proposed rule on Employee or Independent Contractor Classification Under the Fair Labor Standards Act, reopening the debate over how to classify U.S. workers. Worker classification refers to whether a worker should be distinguished as an employee or an independent contractor, a critical determination for wage and overtime pay considerations

A host of important considerations underlie the distinction, making clarity important for both workers and employers. The ramifications encompass significant tax and liability issues for businesses and essential protections and rights for workers. If the legal test used to determine worker classification is modified again, U.S. employers and workers will need to reexamine their relationships with one another. 

The Independent Contractor/Employee Distinction and Misclassification

Under federal labor laws, employees are entitled to protections and rights, including minimum wage and overtime pay, while contractors are not. And while independent contractors may enjoy certain freedoms employees do not, businesses enjoy avoiding the taxes and legal liabilities that accompany employment.

According to the DOL’s October 11, 2022, News Release, misclassifying workers as independent contractors “promotes wage theft, allows certain employers to gain an unfair advantage over law-abiding businesses, and hurts the economy at large.” The department intends to crack down on the abusive practice.

How the Determination Is Made: The Economic Realities Test

For seventy-plus years, the “economic realities test” has been the standard to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). While the longstanding test has endured some sculpting over the years, its main consideration remains whether a worker is economically dependent on the employer for work or is truly in business for themself.

The prominent factors guiding the inquiry are:

• The worker’s opportunity for profit or loss, depending on managerial skill.
• The extent to which the work performed is an integral part of the employer’s business.
• The investments by the worker and the employer.
• The degree of skill and initiative exhibited by the worker.
• The degree of permanence of the working relationship.
• The nature and degree of the worker’s control over the work.

Weighing each factor equally and holistically is a key component of the Proposed Rule and represents a change from the current standard.

The 2021 Rule and the DOL’s Proposed Rule

Currently, the 2021 Rule prioritizes the degree of control and the opportunity for profit and loss as the two “core factors” carrying more weight than the others. Consequently, that greater emphasis makes it easier for businesses to classify their workers as independent contractors and avoid the greater cost employees present.

The DOL’s Proposed Rule represents a return to a worker classification model favoring a broader scope of considerations where no one factor is determinative; all factors must be considered in a totality of the circumstances analysis. The DOL suggests this approach better aligns with the FLSA’s purpose and the courts’ FLSA interpretation. 

The Potential Impact of the Proposed Rule

The Proposed Rule will allow for more circumstances where workers should be classified as employees; therefore, companies will have less flexibility in designating workers as independent contractors. In short, by expanding the definition of employee, the Proposed Rule increases the risk that some workers may soon be wrongfully classified under federal wage and hour law. Whether a worker is eligible for protections afforded only to employees could require a deeper dive into the working relationship between a worker and an employer to avoid costly litigation.

In the end, employers may not be able to retain every reclassified worker, and for workers who want to maintain their independent contractor status, reclassification may lead to hard choices.

The Best Course of Action for Employers and Workers

Wrongful classification affects a wide range of workers across the industry spectrum and is a problem DOL remains committed to addressing. Now is the right time for businesses to review their policies, practices, and relationships and for workers to be thoughtful about their circumstances. The attorneys in Sommers Schwartz’s Unpaid Wages and Overtime Pay group are prepared to help workers concerned about the potential for misclassification examine their relationships with employers under the lens of the Proposed Rule to assess how changes anticipated next year may affect their professional lives.