New Proposed Rule on Independent Contractors: DOL’s Latest Plan for Overhaul of the Existing Standard

On October 11, 2022, the U.S. Department of Labor (DOL) issued a new proposed rule that is more aligned with judicial precedent than a previous proposal regarding whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The proposed rule would rescind the Independent Contractor Rule (2021 IC Rule) promulgated by the Trump administration on January 5, 2021, which has been criticized by some for making it easier for businesses to classify workers as independent contractors.

This is the DOL’s second attempt to rescind the 2021 IC Rule, after a Texas federal court ruled that the DOL’s first revision failed on procedural grounds. The DOL’s latest proposal may also face legal challenges when it is made final. The proposal is subject to a 45-day comment period beginning October 13, 2022, the date of publication in the Federal Register.

The Subjectivity of the Proposed Rule Means Flexibility, But Lack of Clarity and Certainty

In supplementary information provided by the DOL for context and to explain the rationale for the specific regulatory language changes, the DOL states that it does not believe the proposed rule would result in widespread worker reclassification. The notice states, “That is, for workers who are properly classified as independent contractors, the Department does not, for the most part, anticipate that this rule would result in those workers being reclassified as employees.” It explains that impacts of the rule would primarily stem from “a reduction in misclassification.” While the multi-factor analysis, with no factor having consistently greater emphasis, will provide a welcome degree of flexibility for employers, its degree of subjectivity means a lack of clarity and certainty as to whether treatment of workers who qualify as independent contractors according to some factors but not others would be deemed properly classified by the DOL.

The Proposed Economic Realities Analysis 

The proposed rule would modify Title 29 of the Code of Federal Regulations addressing whether workers are employees or independent contractors under the FLSA. The proposed rule adopts an economic reality test and emphasizes that the economic realities factors are “guides” to be used to conduct a totality-of-the-circumstances analysis. The totality-of-the-circumstances analysis considers all relevant factors and does not assign any predetermined weight to any single factor. The proposed rule also departs from the existing approach that emphasizes two “core” factors — control and opportunity for profit or loss. The factors are not exhaustive, and no single factor is dipositive. The proposed rule discourages applying a “formulaic or rote” analysis that isolates each factor.

The proposed rule introduces the following factors for analyzing whether an individual is an employee or independent contractor under the FLSA:

• The opportunity for profit or loss depending on managerial skill (Proposed § 795.110(b)(1)): Relevant facts include how the fee for services is determined; whether the worker may accept or decline jobs or determine when and in what order to perform jobs; whether the worker advertises or otherwise engages in efforts to expand the worker’s business; and whether the worker makes decisions on hiring other workers, purchasing materials and equipment, and securing workspace.
• The investment by the worker and the employer (§ 795.110(b)(2)), including whether the worker has made investment sufficient to support an independent business. The proposed rule returns the “investment” factor to standalone factor status and considers facts such as whether the investment is capital or entrepreneurial in nature and the worker’s investment relative to the employer’s investment.
• The degree of permanence of the work relationship (§ 795.110(b)(3)).
• The nature and degree of control (§ 795.110(b)(4)), with relevant facts including who sets the worker’s schedule, whether the worker is restricted in working for others, and who supervises the performance of the work including by technological means and in terms of authority to issue disciplinary action. The proposed rule provides “significant” additional guidance for the control factor, including discussion of how scheduling, supervision, price-setting and the ability to work for others should be considered. The DOL acknowledges that some control may arise from the employer’s compliance with legal, safety, or health standards or requirements to meet contractual or quality control obligations. However, the Department emphasizes that the control analysis should be examined in view of the “ultimate” inquiry — whether the worker is truly running an independent business or is economically dependent on a single employer.
• The extent to which the work performed is an integral part of the employer’s business (§ 795.110(b)(5)), with performance of work that is critical, necessary or central to the employer’s principal business weighing in favor of employee status. The proposed rule returns this factor to the DOL and judicial interpretation of whether the work is integral to the employer’s business rather than whether it is exclusively part of an “integrated unit of production.”
• Skills and initiative (§ 795.110(b)(6)). Work requiring specialized skills the worker provides without training by the employer will help support independent contractor status.
• Additional factors to be considered (§ 795.110(b)(7)). The proposed rule would reiterate the existing provision that the enumerated factors are not to be applied mechanically and should be reviewed along with any other relevant factors that indicate economic dependence or independence.

Effect on Specific Industries and State Law

The proposed rule includes cross-references to other industry-specific guidance, such as addressing the employment status of sharecroppers and tenant farmers under 29 CFR § 780.330(b), or independent contractor guidance for the logging and forestry industry under 29 CFR § 788.16(a). The proposed rule does not currently revise its regulations addressing migrant workers under the Migrant and Seasonal Agricultural Worker Protection Act (MSPA) because the MSPA’s contractor test is “substantially similar” to the proposed rule. The Department is encouraging comments on whether MSPA should be revised to more fully reflect the proposed rule.

The proposed rule would apply only to the contractor analysis under the FLSA and does not change state laws and regulations governing classification of workers as independent contractors. Even if the DOL ultimately adopts the proposed rule, companies should still conduct a separate analysis of contractor status under state law, most particularly in California which continues to follow the ABC test that limits the treatment of workers as independent contractors to a much greater degree than the current or proposed DOL rules.