Labor Department Again Rewrites FLSA Independent Contractor Rules

The U.S. Department of Labor (“DOL”) recently published a proposed rule seeking to revise the test for determining whether a worker is an employee or an independent contractor under the Fair Labor Standards Act of 1938 (“FLSA”), the federal law governing minimum wage and overtime. Importantly, the protections afforded under the FLSA apply to employees, but do not apply to independent contractors.

Under the DOL’s proposed rule, the “ultimate inquiry” would be whether, “as a matter of economic reality,” the worker is “economically dependent” on the employer for work. In making this inquiry, the DOL’s new test would look beyond the employer’s characterization of the worker as an independent contractor, and apply a non-exclusive list of six factors to determine whether the worker is economically dependent on the employer for work or runs, instead, an independent business:

1. Opportunity for Profit or Loss Depending on Managerial Skill

This factor considers whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work. Considerations under this factor include the ability to meaningfully negotiate the pay for the work provided, the freedom to accept or decline jobs or to determine when the jobs are performed, whether the worker actively markets their business, and whether the worker makes business decisions like hiring, purchasing materials and equipment, or renting space. The DOL explicitly notes that simply deciding to work more hours or take more jobs is not the kind of managerial skill implicated by the first factor.

2. Investments By the Worker and the Employer

This factor considers whether the worker has made investments that are capital or entrepreneurial in nature, increasing the worker’s ability to do different types of or more work, reduce costs, or extend market reach. Examples may include purchasing business-related software packages, buying new equipment to improve efficiency across multiple jobs, and leasing office space. On the other hand, costs borne by a worker to perform a job, such as tools or materials to perform specific jobs, are not considered capital or entrepreneurial.

3. Degree of Permanence of the Work Relationship

Here, the DOL observes that exclusive working relationships – like full-time employment – are typically indefinite or continuous in nature. Therefore, this factor weighs in favor of employment when the relationship is ongoing or open-ended. In contrast, this factor weighs in favor of finding independent contractor status where work relationship is definite in duration, non-exclusive, project-based, or sporadic.

4. Nature and Degree of Control

The employer’s ability to control the performance of the work and the economic aspects of the working relationship is weighed as the fourth factor. This includes control over matters like the worker’s schedule, job performance, discipline of the worker, and the worker’s ability to perform services for others. In addition, the employer’s control over economic aspects of the working relationship – like the prices of and marketing for the services or products provided by the worker – will also be considered.            

5. Extent to Which the Work Performed is an Integral Part of the Employer’s Business

In one of its more controversial aspects, the proposed rule would require consideration of whether the function performed by the worker is an integral part of the employer’s business. Where the work performed by the worker is critical, necessary, or central to the employer’s business, this factor will weigh in favor of employment status. To illustrate the point, the proposed rule provides the example of a farm that grows tomatoes for sale to distributors. For workers who pick tomatoes during harvest season, this factor would weigh in favor of employee status because the farm is in the business of farming tomatoes, and these workers are integral to that business. In contrast, for an accountant engaged by the farm to file its annual tax return, this factor would weigh in favor of finding an independent contractor relationship because the accounting support is not critical, necessary, or central to the principal business of the farm.   

6. Skill and Initiative

This factor considers whether the worker uses specialized skills to perform the work and whether they also use those skills to develop new business. If so, this factor would lean toward independent contractor status. By contrast, where the worker does not use specialized skills in performing the work, is dependent on the employer to train the worker to perform the work, or does not use their specialized skills in an entrepreneurial way, this factor weighs in favor of finding an employment relationship.

Effect on Employers

At this point, the rule is only in its proposed form. The public will now have until December 13, 2022 to provide comments. Once the DOL has reviewed all of the comments, it will decide whether it will revise the proposed rule before it publishes a final rule.

Making matters more confusing, there are different tests that apply to different aspects of the employment relationship – for example, the IRS uses a different test for payroll tax purposes to determine whether a worker is an employee or independent contractor. State laws also vary widely. There also may be situations in which a worker satisfied the independent contractor test in place during the prior administration—which focused on the employer’s control over the work and the worker’s opportunity for profit and loss—but would not meet the test set forth in the new proposed rule. A finding that a worker is misclassified can lead to unpaid wages, fees and other damages. Accordingly, employers who utilize independent, non-employee service providers should pay close attention to these developments and begin planning to address possible concerns following implementation of a final rule in the coming months.

If you have any questions regarding the proposed rule and the impact it may have on your employment practices, please contact one of our Labor & Employment attorneys.