On October, 11, 2022, the U.S. Department of Labor (DOL) released a proposed rule to update the test for determining whether a worker is an employee under the Fair Labor Standards Act (FLSA) or an independent contractor. The proposal would significantly broaden the classification of workers as employees under the FLSA.
Traditionally, to determine whether a worker is an employee or contractor, the DOL and courts have analyzed whether the worker is economically dependent on the employer for work or is in business for themselves. Under this so-called “economic realities” test, the DOL analyzes the totality of the circumstances under several factors including: (1) the opportunity for profit or loss, (2) investment by the worker (3) permanency of the relationship, (4) the degree of control by the employer over the worker, (5) whether the work is an integral part of the employer’s business, and (6) skill and initiative. This test has been developed through informal guidance and court decisions, but was not codified in regulations issued by the DOL.
2021 Rule. In January 2021, the DOL issued a rule titled “Independent Contractor Status Under the Fair Labor Standards Act” (2021 IC Rule), which designated two factors – the nature and degree of control over the work and the worker’s opportunity for profit or loss – as “core factors” that carry greater weight in the analysis and was aimed at narrowing the scope of who would be considered an employee.
Proposed Rule. Shortly after President Biden was inaugurated, the DOL stayed implementation of the 2021 IC Rule and rescinded it in Spring 2021, leaving the DOL’s prior economic realities test in effect. A coalition of business groups challenged that fact, leading to a federal court in Texas finding the May 2021 rescission improper.
The newly-proposed rule would rescind the 2021 rule once again and analyze the totality of the circumstances under the following factors, which would now be codified through formal rulemaking, rather than being subject to the vagaries of differing guidance issued by the DOL based on the views of different administrators.
Opportunity for Profit or Loss Depending on Managerial Skill
The DOL’s proposed rule focuses the opportunity for profit or loss factor on whether the worker exercises managerial skill that affects the worker’s economic success or failure.
The proposed rule offers a list of factors relevant to assessing the degree to which the worker’s managerial skill affects the worker’s economic success or failure in performing the work. These include: whether the worker determines, or at least negotiates, their compensation for the work; whether the worker accepts or declines jobs or can meaningfully negotiate the schedule in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, or rent space.
The proposed rule also directs consideration of whether the worker actually has an opportunity for loss, and states that a worker having no opportunity for loss indicates employee status.
Investments by the Worker and the Employer
In contrast to the 2021 Rule, the proposed rule would treat investment as a standalone factor in the economic reality analysis, instead of considering investment within the profit or loss factor. To indicate independent contractor status, a worker’s investment must be “entrepreneurial in nature.” This means that the investments support an independent business and serve a business-like function, such as capital investments in expensive equipment, marketing, and office space. Notably, under the proposed rule, costs borne by the worker simply to perform their job, like basic tools, are not evidence of capital or entrepreneurial investment.
Degree of Permanence of the Work Relationship
This factor analyzes whether a work relationship is indefinite in duration or continuous. A fixed term of employment is common for independent contractors, whereas employees usually only work for one employer, and such relationship is continuous and of indefinite duration.
Nature and Degree of Control
This factor considers the employer’s control over the performance of the work and the economic aspects of the working relationship. In contrast to the 2021 Rule, the proposed rule would not make this a “core” factor in the test. The DOL reasoned that issues related to scheduling, supervision, and a worker’s ability to work for others are relevant considerations, but that the factor itself should not be weighted more heavily than any other factor.
Extent to Which the Work Performed is an Integral Part of the Employer’s Business
Unlike the 2021 Rule, the proposed rule would return to framing this factor as whether the worker’s work is an “integral part” of the employer’s business. This factor asks whether the work is “critical, necessary, or central to the employer’s business,” as compared to being merely peripheral. The DOL offers the example of a tomato growing business where tomato pickers are deemed integral, while an accountant providing non-payroll accounting support is merely peripheral.
Skill and Initiative
This factor considers the amount of skill required for the work. If the work at issue requires specialized training or skill that the employer does not provide, then the employee is more likely to be an independent contractor. If the work requires no specialized training or the worker is dependent upon the employer for training, then the worker is more likely to be an employee.
Finally, the proposed rule provides that the DOL may consider additional factors if they are relevant to whether workers are economically dependent on the employer for work or in business for themselves.
Next Steps for Employers. The proposed rule will be officially published in the Federal Register on October 13, 2022, after which the public will have 45 days to comment. It is likely that a legal challenge to the rule will ensue based on what has happened in the past when the DOL has tried to expand its view of who should be so considered an employee.
Ballard Spahr’s Labor and Employment Group regularly advises clients on navigating the FLSA and worker classification issues, including overtime exemption classifications and independent contractor classifications. The Labor & Employment Group also assists employers by conducting classification audits. We also are available to assist employers in preparing comments on the rule.
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