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DOL Proposes a Long-Awaited Independent Contractor Rule

on Friday, 21 October 2022 in Labor & Employment Law Update: Sarah M. Huyck, Editor

On Tuesday, October 11, 2022, the U.S. Department of Labor (“DOL”) issued a Notice of Proposed Rulemaking (“NPRM”) for a highly anticipated rule involving independent contractor status.  The DOL’s goal with the proposed rule is to provide a “clear explanation of the test for whether a worker is an employee under the Fair Labor Standards Act (“FLSA”) or an independent contractor not entitled to the protections of the Act.”  The DOL stated the newly proposed rule more closely aligns with judicial precedent and existing case law.

DOL’s Proposed “Economic Realities” Test

Under this new proposed rule, the DOL defines “independent contractors” as workers who “as a matter of economic reality, are not economically dependent on their employer for work and are in business for themselves.”  The core idea of economic dependence underlies the factor-based analysis the DOL proposes in considering independent contractor status. Aligning with the economic realities test, the DOL identifies these factors as:

1. Opportunity for profit and loss based on managerial skill. For example, this factor considers (but is not limited to):

     a. Whether an individual has opportunities to invest in equipment, materials, or helpers to further their work;

     b. Whether an individual can set their own rates or earnings;

     c. Whether an individual manages their own schedule;

     d. Whether an individual can make employment decisions for others (such as hiring, firing, and assigning subordinate agents);

     e. Whether an individual has decision-making authority to handle things like client bases, advertising, pricing, and management.

An answer of “no” to these considerations may weigh towards a finding for “employee” classification under this factor.

2. Investments by the worker and employer. Under this factor, the analysis would consider (but is not limited to):

    a. Whether investments borne by the worker are “capital or entrepreneurial in nature”?

Notably, costs for a worker to perform their job (such as tools and equipment used for labor) are not evidence of capital or entrepreneurial investment.

The DOL also emphasizes that the use of a personal vehicle that an individual already owns or leases to perform work is generally not an investment that is capital or entrepreneurial in nature.  This example is likely directed squarely at rideshare services like Uber and Lyft.

    b. Whether investments generally support an independent business or serve a business-like function (such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach)?

An answer of “no” to these questions may weigh towards a finding for “employee” classification under this factor.

3. Degree of permanence of the relationship. This factor involves consideration for the duration, definiteness, exclusivity, and type of work relationship.  An indefinite or continuous relationship would suggest an employment relationship under this factor, depending on the circumstances.  However, the DOL also recognizes that “lack of permanence” is not necessarily an indicator of independent contractor status, such as what is commonly found in certain temporary and seasonal work.

4. Nature and degree of control. This centers on the level of control over meaningful economic aspects of the work relationship, with a focus on the following identified factors:

    a. Compliance with legal obligations – Is the potential employer imposing contractual or quality control obligations, legal obligations, or health and safety standards?

Notably, the DOL suggests that imposing compliance with legal obligations or quality control measures may lean towards the “control” factor and a finding for “employee” status, under the totality of the circumstances.  This standard is likely to raise concerns and comments due to practical considerations.

    b. Scheduling – Does an individual have the ability to select their hours of work? Does an individual have a schedule that provides time to find and work for other clients?

If the answer is “no”, this may weigh in favor of an “employee” determination under this factor.

    c. Supervision – Can an individual work independently without close supervision?

If the answer is “no”, this may weigh in favor of an “employee” determination under this factor.

     d. Setting prices or rates – Can the individual set, or influence, the rate or price of goods or services provided to the potential employer?

If the answer is “no”, this may weigh in favor of an “employee” determination under this factor.

     e. Ability to work for others – Is the individual required to, directly or indirectly, work exclusively for the potential employer?

If so, this may weigh in favor of an “employee” determination under this factor.

5. Extent to which the work performed is an integral part of the employer’s business. Under this factor, consider whether the work is an integral part of the employer’s business? In other words, is the work critical, necessary, or central to the employer’s business?  If so, this factor may weigh in favor of an “employee” classification.

6. Skill and initiative. This focuses on whether the worker has a specialized skill used in the performance of work and whether that skill “contribute[s] to business-like initiative[s]” which would suggest independent contractor status, instead of employee status.

Importantly, the proposed rule considers all of these factors in a “totality of the circumstances” analysis.  This means there is no weight or elevated significance assigned to any of these factors. 

The “totality of the circumstances” approach is one of the most significant changes under DOL’s newly proposed rule.  For context, in January 2021, the DOL published a rule addressing independent contractor status under the Trump administration’s guidance.  This January 2021 rule designated two “core factors” which carried greater weight under classification analysis.  The newly proposed rule aims to formally repeal the January 2021 rule and would, as a result, give similar probative value to all listed factors.

And for those of you who are reading this with a sense of déjà vu, the approach outlined in this NPRM is very similar to the DOL’s Administrator’s Interpretation issued in 2015.  That interpretation was subsequently withdrawn by the Trump Administration.

Why Does This Matter?

Independent contractors are a prominent piece of the American workforce and the U.S. economy—especially following the COVID-19 pandemic and the boom of gig work opportunities, like Uber or Airbnb, that rely on independent contractors.  The question of “What is an independent contractor?” is not new to employment law or to the DOL, but identifying correct worker classifications are a challenge nonetheless.  Why is that? 

First, there are several existing tests or approaches in considering whether an individual is an employee or an individual contractor.  For example, the Internal Revenue Service (“IRS”) has its own 3-pronged test, based on common law factors focused on control, to evaluate whether an individual is correctly classified as an independent contractor.  To further complicate matters, each state generally has its own law defining and classifying independent contractors—usually involving workers’ compensation and unemployment compensation statutes.

Notably, DOL’s new proposed rule for independent contractors only applies to considerations under the federal FLSA which governs minimum wage and overtime pay protections for employees (and not independent contractors).

Second, factor-based tests considering the totality of the circumstances in each working arrangement are inherently nuanced and flexible in application.  The DOL acknowledges this and notes the newly proposed rule “offers the most flexible, comprehensive, and appropriately nuanced approach which can be adapted to disparate industries and occupations.”  This can lead to areas of uncertainty when applying proper classifications where a court or DOL investigator may take different approaches in analyzing factors.

What Happens Now?

Remember, this announcement from the DOL is only a Notice of Proposed Rulemaking.  Pursuant to typical agency rulemaking procedures, the DOL has merely announced its intention to the revise independent contractor analysis under the FLSA at this time.  In the coming months, interested parties will submit written comments about the DOL’s proposal and the DOL will later finalize a rule for publication.

Interested parties have until November 28, 2022 to submit comments about this proposed rule to the DOL.

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