DOL Releases New Rule on Worker Classification

Employment Law

On October 13, 2022, the Department of Labor (DOL) released a new proposed rule on the question of whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA).

This is the latest in a series of DOL actions on the employee classification issue. In January 2021, the agency released a new rule on worker classification, establishing a five-factor “economic reality” test to determine whether an individual is an independent contractor or an employee. Two core factors drove this determination: the nature and degree of control over the work and the worker’s opportunity for profit or loss.

Just two months later, the DOL announced its plans to withdraw the rule, which was set to take effect in May 2021.

Now, the agency is taking another stab at the topic.

The DOL’s Notice of Proposed Rulemaking (NPRM) would formally rescind the 2021 rule and replace that rule’s reliance on two core factors. The proposed rule would instead use a multifactor, totality-of-the-circumstances test, with no predetermined weight given to a particular factor or set of factors. The proposed rule will be more difficult to satisfy, likely resulting in more workers being classified as employees, not independent contractors.

The test sets out the factors to be considered.

  • Opportunity for profit or loss depending on managerial skill. When considering this factor, the analysis includes whether the worker determines or can meaningfully negotiate the pay for the work provided, accepts or declines jobs or chooses the order and/or time in which the jobs are performed, markets or advertises the worker’s business, and can decide whether to hire others, purchase equipment or materials, or rent space. If a worker has no opportunity for profit or loss, this signals that the individual is an employee.
  • Investments by the worker and the employer. This factor considers whether a worker makes any investments that are capital or entrepreneurial in nature. “Such investments, for example, generally support an independent business and serve a businesslike function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach, thus suggesting that the worker is in business for themself,” the DOL explained in the NPRM.
  • Degree of permanence of the work relationship. An indefinite or continuous work relationship is more likely to be deemed an employment relationship, while a work relationship that is definite in duration, nonexclusive, project-based or sporadic tips in the direction of an independent contractor. 
  • Nature and degree of control. The more the employer controls the performance of the work and the economic aspects of the relationship, the more likely the worker is an employee, not an independent contractor. Relevant factors include whether the employer sets the worker’s schedule, supervises the performance of the work, limits the worker’s ability to work for other companies, uses “technological means” of supervision, has the right or ability to supervise or discipline the worker, or places demands on the worker’s time that leaves them unable to work for others or work when they choose. 
  • The extent to which the work performed is an integral part of the employer’s business. If the function performed by the worker is “critical, necessary or central to the employer’s business,” then the worker is likely to be deemed an employee. 
  • Skill and initiative. Where a worker does not use specialized skills in performing the work or is dependent on training from the employer in order to perform the work, the worker is more likely to be an employee. 
  • Additional factors. In addition to the six factors above, the proposed rule states that “[a]dditional factors may be relevant in determining whether the worker is an employee or [an] independent contractor for purposes of the FLSA, 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.” 

The DOL is soliciting comments on the proposed rule and will accept input until November 28.

To read the NPRM, click here.

Why it matters: Worker classification is a fundamental employment issue, as employers must comply with a gamut of employment laws and requirements for employees but not for independent contractors. If the DOL’s proposed rule becomes final, it will likely result in more workers being classified as employees as opposed to independent contractors.



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