Independent Contractor or Employee? A New Test Might Be Right Around the Corner

Independent contractor or employee? That has long been the question under various federal and state laws. Courtesy of my employment partner Gordon Berger, I’m here to tell you that the United State Department Of Labor (DOL) just released a new proposed rule (“Rule”) that would update the requirements for whether a worker is an independent contractor or an employee under federal law.

The proposed rule, which is set to be published in the Federal Register on October 13, would establish a six-step economic realities test for determining whether a worker is an employee or independent contractor.

A link to the unpublished proposed rule can be found here: https://www.federalregister.gov/public-inspection/2022-21454/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act

Here are relevant excerpts from the Rule:

“the Department is proposing modifications to title 29 of the Code of Federal Regulations addressing whether workers are employees or independent contractors under the FLSA. In relevant part, and as discussed in greater detail below, the Department proposes:

• Not using “core factors” and instead returning to a totality-of-the-circumstances analysis of the economic reality test that has a refined focus on whether each factor shows the worker is economically dependent upon the employer for work versus being in business for themselves, does not use predetermined weighting of factors, and that considers the factors comprehensively instead of as discrete and unrelated;

• Returning the consideration of investment to a standalone factor, focusing on whether the worker’s investment is capital or entrepreneurial in nature, and considering the worker’s investments on a relative basis with the employer’s investment;

• Providing additional analysis of the control factor, including detailed discussions of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the degree of control over a worker, and not limiting control to control that is actually exerted;

• Returning to the longstanding Departmental interpretation of the integral factor, which considers whether the work is integral to the employer’s business rather than whether it is exclusively part of an “integrated unit of production.”

What’s The Test?

And, here is the proposed 6-factor test:

1. Opportunity for profit or loss depending on managerial skill.

2. Investments by the worker and the employer

3. Degree of permanence of the work relationship

4. Nature and degree of control

5. Extent to which the work performed is an integral part of the employer’s business

6. Skill and initiative

The Rule clarifies that “these six factors are not exhaustive” and “[A]dditional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themselves, as opposed to being economically dependent on the employer for work.”

Employer Takeaways

State laws, like in California and New York, are more restrictive. Employers need to know if they are in a state with classification rules vary from federal laws.

Stay tuned, and we’ll see if USDOL implements this new final rule, whether it faces a legal challenges, or even whether President Biden withdraws it.

Penalties for misclassification can result in a host of legal consequences, depending on the infraction, including owing back taxes, FICA, payroll taxes, Social Security, Medicare, sick leave, interest, liquidated damages, and criminal and civil penalties. This is a good time for employers to examine employment classifications and consider these factors.