DOL Publishes Proposed Rule for Employee or Independent Contractor Classification

On October 13, 2022, the U.S. Department of Labor (DOL) published its proposed rule on Employee or Independent Contractor Classification Under the Fair Labor Standards Act (FLSA).

The proposed rule would revert back to the previous interpretation of the economic reality factors, with a few modifications and clarifications. It would also rescind the 2021 Independent Contractor Rule, which placed greater weight on two of the factors—control over the work and opportunity for profit and loss—and restore the multifactor totality-of-the-circumstances approach to the analysis. Thus, under the proposed rule, no factor or set of factors would have a predetermined weight.

The economic reality factors include:

• the worker’s opportunity for profit or loss depending on managerial skill;
• the worker’s capital or entrepreneurial investment in relation to the employer’s investment in its business;
• the degree of permanence of the work relationship between the parties, the nature and degree of control over the work (specifically including, but not limited to, scheduling, supervision, price-setting and ability to work for others);
• the extent to which the work is integral to the employer’s business; and
• the skill and initiative involved in performing the work.

The proposed rule indicates that this list is not exhaustive and that additional relevant factors may exist in some circumstances.

The DOL explained in its announcement of the proposed rule that the change is meant to combat misclassification of employees as independent contractors and protect employees’ rights under federal labor standards. For employers, however, the proposed rule increases the risk that some of their workers are misclassified.

Because this is a proposed rule, it is not yet final and will not be effective immediately. The proposed rule will be open to public comment for 45 days—until November 28, 2022—after which the DOL will issue a final rule. Furthermore, the final rule will likely face challenges in court.

Employers who would like to comment on the proposed rule should do so before the November 28, 2022 deadline. Otherwise, employers should become familiar with the contents of the proposed rule, keep an eye on its status and watch for the issuance of a final rule.

In the interim, now is a good time for employers to assess their worker classifications and make any changes that may become necessary.

Employers who want to ensure their independent contractors stay classified as such may consider changing their policies or practices to improve their chances of satisfying the new test for independent contractors. Employers who are concerned about the increased risk that some of their workers may be misclassified as independent contractors under the new rule may begin assessing how to transition those workers to employee status, including changes to time tracking, pay and benefits.

The text of the proposed rule can be accessed here.

Brooks Pierce employment attorneys regularly assist employers with employee and independent contractor classification under the FLSA, including DOL Wage & Hour Division investigations. For assistance on any of these issues, please contact a member of our Labor & Employment Team.