Earlier this month on Thursday, October 13, 2022, the US Department of Labor (“DOL”) published a Notice of Proposed Rulemaking (“Proposed Rule”) that proposes guidance on determining employee or independent contractor classification under the Fair Labor Standards Act (“FLSA”).
Why Does the Classification Matter?
Classifying whether a worker is an employee or an independent contractor is significant because, unlike employees, independent contractors are not entitled to minimum wage, overtime pay, and other protections under the FLSA. Misclassification can subject employers to class and collective actions and expose them to significant liability.
New Proposed Rule Expands Definition of “Employee”
The Proposed Rule departs from the currently effective 2021 Independent Contractor Rule (“2021 IC Rule”). Unlike the 2021 IC Rule which allows employers with greater flexibility in designating workers as independent contractors, the Proposed Rule pulls back on that flexibility by expanding the definition of “employee”. The Proposed Rule seeks to overturn and replace the 2021 IC Rule – in the DOL’s opinion, the Proposed Rule is “better aligned with judicial precedent and longstanding principles”. By contrast, the 2021 IC Rule is not “fully aligned” with court interpretations of the FLSA text or decades of common law applying the “economic reality test”.
Economic Reality Test
Currently, the 2021 IC Rule identifies five “economic reality” factors in determining worker classification. Two of these economic reality factors are designated “core factors”: the worker’s nature and degree of control over the work, and the worker’s opportunity for profit or loss.
The new Proposed Rule uses a six-factor economic realities test to determine the relationship and affirms that the “ultimate inquiry” is “whether, as a matter of economic reality, the worker is economically dependent on the employer for work (and is thus an employee) or is in business for themself (and is thus an independent contractor)”. The outcome of the analysis under the Proposed Rule depends on the totality of the circumstances and considers the following factors (without placing greater importance or weight on any one factor):
- Opportunity for profit or loss depending on managerial skill.
- Investments by the worker and the employer.
- Degree of permanence of the work relationship.
- Nature and degree of control.
- Extent to which the work performed is an integral part of the employer’s business.
- Skill and initiative.
The Proposed Rule acknowledges that additional factors may be relevant in determining whether a worker is an employee or independent contractor “if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the employer for work”.
Until December 13, 2022, the DOL will be accepting comments from the public before finalizing the Proposed Rule. It is expected that the Proposed Rule will come into effect early 2023.
For more information about the DOL’s new Proposed Rule, differences between employee and independent contractors and the potential penalties of misclassification, please contact us at info@mnklawyers.com.
This material is provided for informational purposes only. It is not intended to constitute legal advice, nor does it create a client-lawyer relationship between MNK Law and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material.
