A proposed rule from the U.S. Department of Labor (“DOL”), published Feb. 26, could once again change how employers classify workers as employees or as independent contractors. Properly classifying a worker can provide businesses with significant cost savings.
Independent contractors reduce overhead costs because employers typically do not provide them with benefits, pay payroll taxes on their compensation, or provide ongoing training.
Moreover, many state and federal employment laws do not apply to independent contractors, which further reduces legal exposure for the business. However, misclassification can be costly.
With the constantly shifting tests and rules, every change, including the presently proposed DOL rule, creates the risk of mistakes that may expose businesses to audits, investigations, and lawsuits, potentially resulting in years of back pay and liquidated damages liability.
Current Worker Classification Standard: The Biden Six‑Factor Test
The rule proposed by President Trump’s DOL (Trump Rule) would rescind the current rule that President Biden’s DOL implemented (Biden Rule) in 2024. The current Biden Rule is viewed as pro-employee because it requires a six factor non-exhaustive test, as well as additional consideration factors, to decide if a worker is an independent contractor or not. This test is seen as a challenging one due to the many factors that must be considered in the analysis and significant ambiguity.
Under the Biden Rule, it is difficult to classify the worker as an independent contractor. The result is more workers are classified as employees and are therefore entitled to wage protections, overtime rights, and federal law protections, which is more costly for businesses.
Overview of the DOL’s Newly Proposed Independent Contractor Rule
The proposed Trump Rule is viewed as pro-employer because it reduces the regulatory barrier for businesses to classify workers as independent contractors by clearly focusing on a couple of main factors. According to the DOL press release:
“The analysis in the department’s proposed rule would:
- Apply an “economic reality” test to determine whether a worker is in business for themselves as an independent contractor or an employee economically dependent on an employer for work.
- Identify and explain two “core factors” to help determine if a worker is economically dependent on an employer for work or in business for themselves:
- The nature and degree of control over the work.
- The worker’s opportunity for profit or loss based on initiative and/or investment.
- Identify other factors to help determine a worker’s status as an employee or independent contractor, including the amount of skill required for the work, degree of permanence of the working relationship, and whether the work is part of an integrated unit of production.
- Advise that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
- Provide eight fact-specific examples applying the factors to real-life circumstances.”
The proposed Trump Rule would apply to the Fair Labor Standards Act (FLSA), Family and Medical Leave Act (FMLA), and Migrant and Seasonal Agricultural Worker Protection Act (MSPA).
Impact of the Proposed Rule on Employers
Employers will likely welcome the proposed Trump Rule because many believe it will provide a more predictable and much clearer standard, which will allow businesses to operate more efficiently while also saving significant costs.
On the other hand, those against the proposed Trump Rule argue that it facilitates an environment that allows businesses to take advantage of the American worker. For example, those against the proposed Trump Rule believe it will lower access to protections like minimum wage, overtime pay and leave rights.
It is important to note that nothing is final yet. The 60-day period to provide comments on the proposed rule is currently open, meaning the DOL may make changes or revisions. In all likelihood, a slightly modified version will be published and finalized in the coming months, at which time we will provide an update.
We recommend all businesses consult with their legal counsel to discuss the potential impact of the proposed Trump Rule that relaxes the requirements for classifying workers as independent contractors under federal law.
