With the holiday season upon us, many businesses may be supplementing their workforce with seasonal workers. Are those workers full-fledged employees entitled to the protections of the Fair Labor Standards Act (FLSA) or are they independent contractors? The answer to this question may change if the U.S. Department of Labor’s proposed rule concerning independent contractor classification is adopted. The DOL has said that the classification of workers as either employees or independent contractors is an area of focus for the agency, and this proposed rule is evidence of that focus.
So what does this mean for your business? While the DOL did not go as far as it could have to tip the scale in favor of “employee” classification, the proposed rule will narrow the path by which businesses are able to classify workers as independent contractors, as compared to the current rule. The DOL maintained the general “economic realities” test in its proposed rule, but the framework is different: a six-factor “totality of the circumstances” test, rather than two weighted “core factors.”
According to the DOL, the proposed rule is designed to reveal whether workers are, as a matter of “economic reality,” “economically dependent” upon the employer or are in business for themselves. If you use independent contractors, here is what you need to know.
The proposed rule has six factors, which the DOL describes in some detail in the notice of proposed rulemaking. The factors, which are to be viewed holistically, are:
- Opportunity for profit or loss depending on managerial skill (looking for whether business skill affects economic success or failure, including the ability to negotiate job pay and/or timing)
- Investments by the worker and the employer (looking to investments by the worker that are capital or entrepreneurial)
- Degree of permanence of the work relationship (noting that temporary or short-term work is not necessarily indicative of contractor status)
- Nature and degree of control (looking to scheduling, supervision, ability to set prices, and ability to work for others)
- Extent to which the work performed is an integral part of the employer’s business (looking to whether the work is critical, necessary, or central to the business)
- Specialized skill and initiative (looking to whether the worker is taking business-like initiative to advance his or her independent business)
The proposed rule further states that “additional factors” may also be considered where applicable to underscore the notion that the six enumerated factors should not be mechanically applied and that “economic reality” is what matters, not labels or formalities. The DOL explains that under this proposed rule, the analysis should be fluid in order to assess the reality of the relationship in its totality, with no one factor receiving greater weight.
The proposed rule has a number of administrative barriers to hurdle before it becomes final, likely in early 2023. Undoubtedly, if adopted, it will leave many businesses unsure of how to proceed, as the proposed rule is far more nuanced than the current “core factor” rule.
Current Independent Contractor Rule
By contrast, the DOL’s current independent contractor rule, which was finalized in 2021, includes five factors with two “core factors” receiving greater weight. Under the current rule, if the core factors point toward contractor status, there is a “substantial likelihood” that the worker is a contractor, notwithstanding the other three factors. The two core factors are 1) the nature and degree of control over the work and 2) the worker’s opportunity for profit or loss.
The DOL explains in the Notice of Proposed Rulemaking that the current rule is to be repealed because it is inconsistent with existing judicial precedent, not to mention past DOL sub-regulatory guidance.
In the Entrepreneurial Spirit
Permeating the proposed rule is the DOL’s apparent view that an independent contractor should be entrepreneurial in nature. At least four of the six factors look for entrepreneurial or business initiative, skill or acumen, i.e. opportunity for profit or loss; investment by the worker; the control factor; and skill and initiative. For instance, the proposed rule describes having mere skill alone as necessary, but not sufficient. Rather, a highly skilled worker should also take “business-like” initiative to, for example, market his or her skills to generate new business from multiple companies, and in that way can show that he or she is truly an independent contractor.
Another example lies in the worker investment factor, where the DOL explains that it looks for investment that will expand the worker’s market reach or the types of jobs the worker can perform—not mere investment in tools or equipment to perform a specific job.
Businesses that use independent contractors can get ahead by analyzing the relationship between your company and the contractors in light of the six factors in the proposed rule and adapting if necessary. Indeed, workers who may have been independent contractors under the 2021 rule, or even the pre-2021 guidance, may no longer be properly classified. Given that the DOL has indicated this is an area of focus and the fact that a new rule may spur a wave of collective action litigation, considering taking a proactive approach is prudent.