[co-author: Lindsey Cook]

The U.S. Department of Labor (DOL) released a proposed rule on October 11, 2022, that could change whether a worker is determined to be an employee or an independent contractor under the Fair Labor Standards Act (FLSA).

If implemented, the new rule, which was published in the Federal Register on October 13, 2022, and will remain open for public comment until November 28, 2022, will overturn the independent contractor test that courts applied during the Trump Administration. That rule instructed courts to apply an abbreviated version of the economic-reality test, focusing primarily upon: (1) the nature and degree of the worker’s control over the work, and (2) the worker’s opportunity for profit or loss.

The proposed rule takes a totality-of-the-circumstances approach and looks at: (1) the worker’s opportunity for profit or loss; (2) investments by the worker and the employer; (3) how permanent the work relationship is; (4) nature and degree of control; (5) whether the work is an integral part of the employer’s business; and (6) skill and initiative. This proposed rule resembles the “ABC test” that many state courts apply, including California, New Jersey, and Massachusetts. The ABC test presumes that workers are employees unless the employer can establish otherwise, meaning courts are more likely to classify workers as employees than independent contractors.

The Biden Administration has acted to change the Trump-era rule because, it believes, the proposed multi-factor test is more protective of workers’ rights. Employees have more rights than independent contractors because the FLSA’s minimum wage and overtime pay protections do not apply to independent contractors. As such, employers that misclassify workers as independent contractors wrongfully deny them federal labor protections. Under the current rule, courts – and therefore employers – can classify workers as independent contractors based upon just two factors – even if the broader economic-reality test indicated otherwise.

Employers will have to be stringent about how they categorize their workers if the DOL adopts the new proposed rule. A finding of misclassification can result in expensive penalties, such as unpaid overtime and minimum wage, liquidated damages and attorneys’ fees. The IRS can levy additional penalties for misclassification – including criminal charges – if the IRS suspects an employer intentionally misclassified its employees. Employers should take precautions, such as consulting a checklist or structured guidelines each time they hire a new worker. Implementing a standardized system will help to clarify the status of all new hires. Employers should also conduct routine checks to ensure that workers who they hired as independent contractors have not become employees over time due to a shift in the nature of their work. Employers should also recognize that it is not a defense to a misclassification claim that a worker requested to be treated as an independent contractor.

Proper classification of workers can be confusing. Employers should seek legal assistance to confirm they are complying with all federal and state rules.

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