On October 13, 2022, the Wage and Hour Division of the U.S. Department of Labor (DOL) published a proposed rule which — if adopted — would modify its analysis for determining whether a worker is an employee or independent contractor under the federal Fair Labor Standards Act (FLSA). Companies are required to only provide certain benefits and compensation to employees, but not to independent contractors under the FLSA, such as paying minimum wage and overtime compensation.
In addition, companies covered under the FLSA must maintain certain records regarding employees and are prohibited from retaliating against employees for inquiring about pay or filing a complaint with the DOL. For these reasons, this is a hot topic for companies across all industries, as misclassification can lead to significant liability for a company.
Under the DOL's current independent contractor rule, published in January 2021 during the final days of the Trump administration, the DOL identifies five factors but places greater weight on two core factors to consider in determining whether a particular individual is an employee or independent contractor. The two core factors are related to the degree of the company's control over the work and the worker's opportunity for profit or loss.
The new proposed rule takes into consideration six factors to determine whether, as part of a totality of the circumstances, the worker is economically dependent on the employer for work or in business for him or herself to aid in the determination of whether a worker is an employee or an independent contractor. The six factors in the proposed rule include:
- Whether the worker can affect his or her own opportunity for profit or loss by exercising managerial skill. This factor looks to whether the worker sets or negotiates his or her own pay, accepts or declines jobs, chooses the order or time of performance, engages in marketing or advertising to secure more work, hires others, purchases materials or rents space, and thus whether the worker is at risk of experiencing a loss. If the worker can affect his or her own opportunity for profit or loss, this suggests the worker is an independent contractor.
- Whether the worker makes capital and entrepreneurial investments to assist in his or her performance of the work. If the worker makes capital and entrepreneurial investments supporting an independent business or serving a business-like function, this indicates the worker is an independent contractor.
- How permanent the work relationship is. Independent contractor relationships are generally less permanent than the employee/employer relationship.
- The nature and degree of control by the company over the work. The greater the control by the company over the work, the more likely the worker is an employee.
- Whether the work performed is an integral part of the company's business. If the work performed is central to the company's business, the worker is more likely an employee.
- Whether the worker uses specialized skills to perform the work. If the worker uses specialized skills, this indicates the worker is an independent contractor.
Each factor must be considered in relation to the other factors and must be analyzed to determine whether the worker is economically dependent on the employer for work or in business for him or herself. Additional factors may also be relevant performing this analysis.
By moving away from the two-core-factor approach in the January 2021 rule and toward a totality of the circumstances approach, the proposed rule makes it more difficult for companies to classify workers as independent contractors and not employees. Critics of the proposed rule argue it will significantly increase labor costs; for instance, Uber and Lyft have stated that being required to treat their drivers as employees would increase their labor costs by 20-30 percent – as a result, share prices for both companies dropped after the DOL published its proposed rule. Conversely, pro-employee proponents of the proposed rule champion the proposal as protecting workers' rights.
We are currently in the midst of the public comment period on the proposed rule, and companies, workers, and other members of the public have until December 13, 2022 to submit public comments. It is anticipated the DOL will issue a final rule during the second half of 2023 or early 2024.
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