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DOL Issues Proposed Guideline for Independent Contractors

The U.S. Department of Labor (DOL) has issued a proposed guideline to clarify who is an independent contractor under the federal Fair Labor Standards Act (FLSA). Specifically, the DOL is proposing to repeal a 2021 rule in which two main factors—control over the work and opportunity for profit or loss—carried greater weight in determining the status of independent contractors. Under the new proposed rule, employers would use a totality-of-the-circumstances analysis, in which all the factors do not have a predetermined weight.

The 2021 rule, that is still in effect, made it easier for employers to classify workers as independent contractors, thereby avoiding certain benefits (and costs) related to minimum wage, overtime pay and other benefits. By contrast, the new proposed guidelines direct employers to utilize the economic realities test may include:

  • The amount of skill required for the work
  • The degree of permanence of the working relationship
  • The worker’s investment in equipment or materials required for the task
  • The extent to which the service rendered is an integral part of the employer’s business

It should be noted that various states like California and Illinois use the ABC test, under which a worker is considered an employee unless the employer proves that:

  • The worker is free from the control and direction of the hiring entity
  • The worker performs work that is outside the usual course of the hiring entity’s business
  • The worker is customarily engaged in an independently established trade, occupation, or business

What does this mean for employers?

Keep in mind, this is a proposal that may drastically change before a final interpretation is implemented. The DOL will be accepting comments from the public to assist in the rulemaking process through November 28, 2022.

What is interesting is the status of what the DOL just released: it is called a rulemaking and not some issuance of a formal proposal. From a practical analysis, the courts will have to follow prior rulings as the law and it is uncertain if they will ultimately find the DOL’s interpretation persuasive.

Also, this is just one of many rules and as noted above, many states have their own minimum wage and overtime laws, and several of those laws contain different definitions of who is an employee and who is a contractor. As such, the DOL’s proposal does not affect that, nor does it affect the definition of employee vs. independent contractor under all the other federal or state employment statutes, such as the National Labor Relations Act.

Clearly even though this is just a proposal, the guidance is designed to decrease the number of workers employers classify as independent contractors and increase the number of workers classified as employees. This can be seen when reviewing the commentary provided to the various factors, narrowing the circumstances in which an employee can be considered an independent contractor under the FLSA. As such, this could have the biggest impact on gig workers who are prominent in ride-hailing companies, delivery services, and other industries. If enacted, the proposed rule would increase costs for certain businesses.