U.S. DOL Proposes New Independent Contractor Classification Rule

Whether a worker is properly classified as an "employee" or an "independent contractor" has serious consequences under several laws, including the Fair Labor Standards Act (the FLSA). Employees must be paid consistent with the wage and hour requirements of the FLSA and state laws. An employer who misclassifies an employee as an independent contractor might be liable for unpaid wages, overtime pay, benefits and, potentially, for statutory penalties and attorneys' fees.

The U.S. Department of Labor (DOL) recently issued a proposed rule establishing a new test to make it easier for employers to properly classify workers. The proposed rule would replace the DOL rule implemented in 2024 and restore a framework like the one adopted by the DOL in 2021.

The 2024 rule—which remains in effect until the proposed rule is enacted—instructs employers to weigh six factors when classifying a worker:

1. The worker's control over profit and loss.
2. Whether the worker or the potential employer invests capital into the work.
3. The relative permanence of the work.
4. The control a potential employer exerts over the worker.
5. Whether the worker's work is an integral part of the potential employer's business.
6. Whether the worker brings the skill and initiative inherent in the work to the project or the potential employer trains the worker in the skills and initiative necessary for the work.

The proposed rule aims to simplify the classification process by rejecting the holistic six-factor test and implementing a simpler test that hinges on whether the worker is economically dependent on the potential employer. Under the proposed test, two factors take priority:

1. The nature of the work and the degree of control that a party exercises over the work.
2. The worker's opportunity for profit or loss as a product of the worker's initiative or investment into the work.

To evaluate the two factors, employers should consider, among other things:

• Who sets the worker's schedule?
• Does the worker set their own rates?
• As work ebbs and flows, who bears the brunt of profit losses or gains—the worker or the potential employer?
• Can the worker contract their services with other companies?

If both factors indicate that the worker is independent and in business for themself, then the worker is likely an independent contractor. If both factors indicate that the worker is economically dependent on the potential employer, then the worker is likely an employee. In situations where the factors are inconclusive, an employer should consider other factors like those currently considered under the 2024 rule.

The proposed rule is intended to make a worker's classification more predictable, decreasing the likelihood that employers misclassify workers.

The Proposed Rule's Impact on Employers

While the proposed rule is not yet in effect, it will likely become the DOL's classification test before the end of the year. In preparation, employers should reconsider close call classifications under the proposed rule's framework and revisit contracts to be prepared to align contract language with the DOL's proposed framework if necessary.

Caution should be exercised as some things won't change under the proposed rule. First, contract language is not dispositive. Even if a contract tracks with the DOL's framework, the DOL and courts care more about practice. An employer that treats an independent contractor as an employee will likely be liable under the FLSA—even if contracts contain all the magic words. Second, while the proposed framework would govern the DOL's investigation into an employer's wage and hour practices, federal courts are not bound by the DOL's interpretation of the FLSA. Consequently, a federal court could deem the 2024 classification framework to be a better interpretation of the FLSA. Employers who move too fast to switch borderline employees to independent contractors could face liability if a court rejects the DOL's proposed framework. Third, states may apply different tests than the DOL. Re-classifying workers in accordance with the DOL's proposed rule might be inconsistent with state law and expose employers to liability there.

While the proposed rule might be a welcome reprieve for employers by increasing predictability around classification decisions, employers must remain diligent when classifying workers. Misclassifying a worker under the FLSA—or state law—can be costly.

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