The U.S. Department of Labor on Tuesday unveiled a six-step "economic realities" test that looks to narrow employers' ability to classify workers as independent contractors. The changes have broad implications as to whether workers are entitled to minimum wage and overtime, and whether employers must comply with recordkeeping requirements for such employees, under federal law. The misclassification of workers as independent contractors can have dire consequences for employers based on available liquidated (double) damages and attorney's fees under the Fair Labor Standards Act, particularly where such claims are brought as collective actions.
The proposed rule seeks to rescind a Trump-era rule which provided a different, more lenient, classification framework (with a focus on control and opportunity for profit and loss). Prior attempts by President Joe Biden were rebuffed by the courts, including when its May 2021 publications withdrawing a Trump-era independent contractor rule was invalidated by a Texas federal court on the basis that the DOL failed to follow administrative procedure requirements. After initially filing an appeal, the DOL instead sought to publish a new rule.
In essence, the DOL's proposed rule eliminates the emphasis on two factors and instead goes back to a "totality of circumstances" approach that would consider all of the factors involved in the working relationship equally. When determining a worker's status, the Biden DOL would use a multi-factor economic realities test that considers various factors of the working relationship to determine whether the worker is truly operating an independent business.
The proposed rule summarizes the economic realities test used to determine whether a worker is economically dependent on the employer for work or is in business for themselves. The proposed rule also states that no one factor or subset is necessarily dispositive and is not an exhaustive list. The six factors used to determine the economic realities of the work relationship under the proposed rule include:
- Opportunity for profit or loss depending on managerial skill (which considers whether the worker exercises managerial skill that affects the worker's economic success or failure in performing work, such as negotiating the charge or pay for the work provided);
- Investments by the worker and the employer (which considers whether any investments by a worker are capital or entrepreneurial in nature);
- Degree of permanence of the work relationship (employee relationship is generally of an indefinite duration);
- Nature and degree of control (this includes "reserved control" over the performance of the work and economic aspects of the working relationship, including ability to set schedules, supervise performance, and limit ability to work for others);
- Extent to which the work performed is an integral part of the employer's business (not whether any individual worker is particularly integral, but rather whether a function they perform is integral); and
- Skill and initiate (including whether worker uses specialized skills to perform the work and whether those skills contribute to business like initiative, as opposed to being dependent on training provided by employer).
The proposed rule will be officially published in the Federal Register on October 13, 2022. Thereafter, the public will have 45 days to comment.
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