News & Insights

U.S. Department Of Labor Issues New Rule On Independent Contractor Status

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 new rule significantly broadens the classification of workers as employees under the FLSA.

 In January 2021, the DOL previously issued a rule titled “Independent Contractor Status Under the Fair Labor Standards Act” which identified five economic reality factors to determine whether a worker was an employee or independent contractor. However, it 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 which narrowed the scope of who would be considered an employee. This rule made it easier for businesses to classify workers as independent contractors.

The DOL is now proposing to rescind the 2021 Independent Contractor Rule, eliminate the use of “core factors” and return to conducting a totality-of-the-circumstances analysis in which the economic reality factors are not assigned a significant amount of weight, and each factor is considered equally. The DOL believes this rule is more consistent with longstanding judicial precedent prior to the 2021 Independent Contractor Rule.

The proposed rule, “Employee or Independent Contractor Classification Under the Fair Labor Standards Act”, would establish a multi-factor economic realities test. The factors include the following:

1.     The degree of control exercised by the employer over the worker;

2.     The worker’s skill or initiative;

3.     The permanency of the relationship between the parties;

4.     The worker’s opportunity for profit or loss dependent on managerial skills;

5.     The worker’s investment in equipment or other resources as compared to the employer’s investment; and

6.     Whether the work is an integral part of the employer’s business.

The proposed rule clarifies that in some cases one or more factors may be more probative than others, and, one or more factors may not be relevant at all. The rule further explains that these six factors are non-exhaustive and other considerations may arise under certain circumstances.

While the proposed rule permits consideration of all facts, it may make it more difficult for Courts to distinguish between an employee and independent contractor. The deadline to submit comments to the DOL regarding the new proposed rule is November 28, 2022. Employers should keep themselves apprised of state laws that provide more stringent tests to determine whether a worker is an independent contractor or an employee.