By Anita Byer, Setnor Byer Insurance & Risk
At a glance…
- The Department of Labor is proposing a new rule to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act.
- The proposed rule rescinds the 2021 Independent Contractor Rule and restores the multifactor, totality-of-the-circumstances analysis to determine independent contractor status under the FLSA.
- According to the DOL, the proposed rule is more consistent with longstanding judicial precedent and will provide consistency for employers.
- The proposed rule, if finalized, would likely increase the number of workers who would be considered employees under the FLSA.
- The DOL extended the deadline to submit comments on the proposed rule to December 13, 2022. Substantial opposition to the proposed rule is expected.
The Department of Labor is proposing a new rule for determining independent contractor status under the Fair Labor Standards Act. This is significant because correctly classifying workers as employees or independent contractors is crucial for businesses. The correct classification isn’t always obvious and misclassifications can be costly. Unfortunately, the rules for determining independent contractor status lack uniformity and have recently become increasingly inconsistent and uncertain. Time will tell whether the new proposed rule will fix the problem, or just extend it.
According to the DOL, the proposed rule adopts a framework more consistent with longstanding judicial precedent under the FLSA. The DOL believes that the new rule preserves essential worker rights and provides consistency for employers and businesses. To that end, the proposed rule:
- Aligns the DOL’s approach with courts’ FLSA interpretation and the economic reality test.
- Restores the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA.
- Ensures all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
- Reverts to the longstanding interpretation of the economic reality factors.
- Rescinds the 2021 Independent Contractor Rule.
The proposed rule focuses on the economic realities of the worker’s relationship with the employer. A worker is an independent contractor if the worker is, as a matter of economic reality, in business for themself. Six factors must be considered to determine the economic realities of the working relationship and the question of economic dependence.
- Opportunity for profit or loss depending on managerial skill.
- Investments by the worker and the employer.
- Degree of permanence of the work relationship.
- Nature and degree of control.
- Extent to which the work performed is an integral part of the employer’s business.
- Skill and initiative.
No one factor or subset of factors is necessarily dispositive, and the weight given each factor may depend on specific facts and circumstances. Moreover, these six factors are not exhaustive. Additional factors may be considered relevant under some circumstances. Unfortunately, different circumstances can affect the relevancy of any specific factor, so it’s nearly impossible to adopt a one-size-fits-all approach to making this determination.
Despite (or because of) the DOL’s new proposed rule, the difficulty and uncertainty surrounding independent contractor classifications is likely to continue. Employers should carry Employment Practices Liability Insurance to protect against mistakes that are more likely to result from the confusion that always seems to accompany proposed regulatory changes. Please contact us to learn more about EPLI coverage.