On October 11, 2022, the U.S. Department of Labor proposed a Rule that would make it harder for companies to classify workers as independent contractors under the Fair Labor Standards Act (FLSA).
While the Rule will most notably impact industries like delivery and transportation that rely on gig workers, it will likely affect most businesses somehow. One recent survey found that more than a third of U.S. workers – approximately 60 million people – had completed freelance work in the past year.
A Look at the Proposed Independent Contractor Rule
Under the proposal, workers who are “economically dependent” on a company would be considered company employees. As a result, they would be entitled to more benefits and legal protections than independent contractors.
In deciding whether a worker should be considered an employee, the department said it would use a “totality-of-the-circumstances” test and look at six factors:
- Opportunity for profit or loss
- Investments made by the worker and employer
- Degree of permanence of the work relationship
- Degree and nature of control
- Extent to which the work is an essential part of the employer’s business
- Skill and initiative
The department said no factor would hold more weight than another and that the test would be applied to cases individually.
The test sets a lower standard than the current “economic realities test” created by the Labor Department for the Trump administration. That test focused on two core factors – the degree of control workers have over their work and their opportunity for profit or loss based on investment or initiative.
The proposed Rule would only apply to laws enforced by the department such as the federal minimum wage. States and other federal agencies have their own standards for employment status. However, employers in other jurisdictions will likely rely on the agency’s interpretation when deciding worker classifications. And judges will probably look to the interpretation when issuing decisions.
In general, companies benefit by classifying workers as contractors instead of employees because they do not have to pay Social Security payroll taxes or fund unemployment insurance programs.
U.S. Labor Secretary Marty Walsh said in a statement that businesses often misclassify workers as independent contractors and that the Rule’s goal is to protect those workers’ rights to minimum hourly wage and overtime.
Workers misclassified as contractors could be eligible for damages such as backpay of those benefits.
Worker advocacy groups and labor activists welcomed the new proposal. However, the U.S. Chamber of Commerce and other business groups argued that the proposed Rule is too broad and would hurt companies and workers who desire flexibility in their work.
Experts say the Rule’s effect will depend on how strongly it is enforced.
What Actions Should Employers Start Taking?
The proposal has been published in the Federal Register. Companies, workers, and other members of the public will have until Nov. 28 to comment. The Labor Department will then incorporate feedback into a final rule.
A final Rule is not expected until 2023.
Keep in mind that the Rule is in a proposed form. That means that there is nothing that employers need to implement at this time. That being said, employers can ensure their voices are heard by submitting comments on the proposal by the deadline.
And, of course, any new rule is not immune from future legal challenges. Those who oppose it could ask a federal judge to block the Rule temporarily or invalidate it and toss it out.
However, Biden administration officials said they are confident the Rule would pass legal muster as it follows a standard that federal courts have upheld for many years. Courts and the Labor Department have historically used an “economic reality” test when deciding employment classification under the Fair Labor Standards Act. Under this test, independent contractors are in business for themselves and are not economically reliant on their employers.
If you have any questions, please consult with your solicitor or one of the employment attorneys at KingSpry.
