On Tuesday, October 11, 2022, the United States Department of Labor, Wage and Hour Division (DOL), announced a proposed rule clarifying the Fair Labor Standards Act’s (FLSA) independent contractor classification test. The prior rule, issued by the DOL in 2021, focused on “core factors.”  Now, the core factors rule is under review and the DOL may revert to the totality of the circumstances approach. While courts have largely ignored the 2021 Rule, the official reversion has been a subject of ongoing discussion following the change in government administrations.

Background

The FLSA generally provides covered employees with certain wage protections that do not apply to independent contractors.  While the FLSA defines what constitutes a covered “employer” and “employee,” it does not define which workers are “independent contractors.”

Historically, the DOL used a totality of the circumstances analysis of an economic realities test to determine the proper classification of a covered employer’s workers. The economic realities test looks to the relationship between the employer and worker and generally considers the following six factors, none of which are outcome determinative, to assess the totality of the circumstances:

(1) The degree of control that the employer has over the manner in which the work is performed;

(2) the worker’s opportunities for profit or loss dependent on his managerial skill;

(3) the worker’s investment in equipment or material, or his employment of other workers;

(4) the degree of skill required for the work;

(5) the permanence of the working relationship; and

(6) the degree to which the services rendered are an integral part of the employer's business.

The 2021 Rule

In 2021, the Department passed a new “core factors” test to determine a worker’s classification (the “2021 Rule”).  See 86 F.R. 1168-01, 2021 WL 51656 (Jan. 7, 2021). The 2021 Rule elevated two of the five economic realities factors, resulting in a “core factors” test that emphasized “(1) the nature and degree of the worker’s control over the work and (2) the worker’s opportunity for profit or loss” as more outcome determinative than the other three. Id.  Thus, under the 2021 Rule, if a worker had a high degree of control over their own work and had more exposure to profit or loss, then that worker was substantially likely to be an independent contractor.

In the time between the adoption of the final rule and the 2021 Rule’s effective date, the DOL made an about face and attempted to withdraw the 2021 Rule.  This measure proved too little too late as a federal court in Texas reimposed the “core factors” test. See Coalition for Workforce Innovation v. Walsh, No. 1:21-CV-130, (E.D. Tex. Mar. 14, 2022).  Confusion ensued as employers and courts were unsure of which test to apply.

2022 Proposed Rule

Now, the Department expects to set the record straight and reinstate the totality of the circumstances test in a way that does not elevate certain core economic realities factors over the others.  But the Department doesn’t stop there.  The proposed rule also seeks to add to the totality of the circumstances, analysis of the economic realities test by:

• Clarifying that the investment factor focuses “on whether the worker’s investment is capital or entrepreneurial in nature, and considering the worker’s investments on a relative basis with the employer’s investment;”
• Revamping the control factor to provide “detailed discussions of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the degree of control over a worker, and not limiting control to control that is actually exerted;”
• Reinstating a prior interpretation of the integral factor “which considers whether the work is integral to the employer’s business rather than whether it is exclusively part of an ‘integrated unit of production.’”

See Employee or Independent Contractor Classification under the Fair Labor Standards Act, Fed. Reg. Doc. Id. 2022-21454 (Oct. 11, 2022), https://public-inspection.federalregister.gov/2022-21454.pdf. 

Whether this reversion to the old test and additional details for certain factors solves the confusion and other issues associated with the 2021 Rule remains to be seen.  Public comment for the rule runs from until November 28, 2022.  In the meantime, employers should review their employment and independent contractor agreements for the new year and determine whether reversion to the old rule will require adjustment.  Misclassification liability remains a risk for employers, especially in states that passed more expansive legislation creating a presumption of employment statutes.  Employers should carefully consider which tests apply under federal and state law to avoid potential fines and tax liability.