Department of Labor Proposes New Rule to Change Independent Contractor Classification…Again

Adam Hamel Headshot
Adam M. Hamel
Director, Litigation Department and Vice Chair, Employment Practice Group
Published: New Hampshire Business Review
October 20, 2022

In January 2021, during the final days of the Trump Administration, the Department of Labor issued a new rule regarding the classification of employees and independent contractors for purposes of the federal Fair Labor Standards Act.  This rule, viewed by many as being more “employer friendly” than previous DOL policies, applies an “economic reality” test that asks whether “the individual is, as a matter of economic reality, in business for him or herself.”  The test considers five factors, but emphasizes two in particular: the nature and degree of the worker’s control over the work, and the opportunity for profit or loss.  The remaining factors are subsidiary, and are only to be considered if classification is not clear after applying the first two.

Almost immediately, the Biden Administration took steps to delay, and then rescind the Trump era rule.  Earlier this year, a federal court blocked these efforts, and, for now, the 2021 Independent Contractor Rule remains in effect.  All of this back and forth has called into question the standards for determining employee classification questions under the FLSA and has caused significant confusion for employers.

In the latest development in this ongoing story, the DOL issued a new proposed rule on October 13, 2022 which the department says is consistent with long-standing court precedent about worker classification.  The proposed rule would apply a “totality-of-the-circumstances” approach.   Employers, the department, and courts would have to consider six factors, all of which would be entitled to equal weight, in order to determine whether a worker is an employee or a contractor.  The factors are: (1) opportunity for profit or loss depending on managerial skill; (2) investment by the worker and the employer; (3) degree of permanence of the work relationship; (4) nature and degree of control; (5) the extent to which the work performed is an integral part of the employer’s business; and (6) the skill and initiative required.  Unlike the current rule, the proposed rule does not give precedence to any factors over other factors.

Among other things, the DOL believes that the proposed regulation will provide more consistency between the Department’s approach to classification and the way that courts have interpreted the FLSA.  The Department also views this proposed rule as a return to long-established method for analyzing classification questions.

If enacted, the proposed rule would result in many workers who are currently treated as independent contractors being reclassified as employees.  This has the potential to have a significant effect on the “gig economy,” as it is expected that workers like meal delivery workers and rideshare drivers would now be employees.

Secretary of Labor, Martin J. Walsh has said that the proposed rule is necessary to protect workers.  The Secretary has said, “While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers.” He went on to say, “Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages. The Department of Labor remains committed to addressing the issue of misclassification.”

The proposed rule has a ways to go before it is finalized.  After a period of public comment, the DOL will consider the feedback it receives and make a decision about whether to actually issue the final rule.  This isn’t expected to happen until sometime in 2023 or even 2024.  Given the history of the regulation of this issue, it is also likely that court challenges will follow, meaning that it may be some time before a final rule, if issued, would take effect.

It is important to note that the propose rule only effects who is an “employee” for purposes of the FLSA, the federal law that governs minimum wage, overtime, recordkeeping, and youth employment.  Different tests govern who is an employee in other contexts such as federal tax law, and various state laws.  For example, New Hampshire state law provides different tests for determining whether a worker is an employee or an independent contractor for purposes of wage and hour laws, workers’ compensation, and unemployment compensation.  Under these different tests, it is possible for the same worker to qualify for classification as an independent contractor for some purposes but not others.  These different tests can cause challenges for employers in deciding how to classify workers and managing risk associated with misclassification.  Employers should consult with an employment attorney to ensure that workers are being classified properly in order to minimize risk to the business.