The Department of Labor (DOL) has extended the public comment period on its newly proposed test to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). If adopted, the proposed rule would rescind a prior rule published on January 7, 2021 (2021 IC Rule). Importantly, the new test would only apply to classifying workers under the FLSA. Different tests apply for determining employee status under, for instance, the Internal Revenue Code, Title VII and state employment laws.
The proposed rule adopts the “economic realities test” and focuses predominantly on whether the worker is economically dependent on the employer or is in business for themselves. The test uses a totality of circumstances analysis, which considers multiple factors instead of a set criteria to determine whether the individual is an independent contractor. The proposed rule provides the following factors as guidance to determine the worker’s classification:
- 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.
- Investments by the worker and the employer.
- This factor considers whether any investments by a worker are capital or entrepreneurial in nature.
- Degree of permanence of the working relationship.
- This factor weighs in favor of the worker being an employee when the working relationship is indefinite or continuous. This factor weighs in favor of the worker being an independent contractor when the working relationship is definite in duration, non-exclusive, project-based, or sporadic.
- Nature and degree of control by the employer over the worker.
- Facts relevant to the employer’s control over the worker include whether the employer sets the worker’s schedule, supervises the performance of the work, or explicitly limits the worker’s ability to work for others.
- Extent to which the work performed is an integral part of the employer’s business.
- This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the employer’s principal business. This factor weighs in favor of the worker being an independent contractor when the work they perform is not critical, necessary, or central to the employer’s principal business.
- Skill and initiative.
- This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the employer to perform the work.
The above list is non-exhaustive, and the proposed rule states that additional factors may be considered if such factors are indicative of whether the worker is economically dependent on the employer or in business for themselves.
If implemented, the practical effect of the new rule is that some workers who may have been considered independent contractors under the 2021 rule would now be considered employees because of the rule’s focus on the independent contractor not performing work that is an “integral” part of the employer’s business. For example, individuals working for a food delivery app, which their employers have generally regarded them as independent contractors, arguably perform work integral to the employer’s business. Workers reclassified as employees will be subject to the FLSA’s minimum wage and overtime rules.
The DOL has extended the deadline to submit comments to December 13, 2022. To read the full text of the proposed rule and information on the deadline for submitting comments and the procedures for submitting comments, visit Federalregister.gov.
If you have questions about this newly proposed independent contractor test or other employment law matters, please reach out to Katie or a member of the HSB Employment Law practice team.