On Oct. 13, 2022, the Department of Labor (Department) published a proposed rule, titled, “Employee or Independent Contractor Classification Under the Fair Labor Standards Act,” which seeks to clarify the legal standards governing the classification of workers as independent contractors under the Fair Labor Standards Act (FLSA). In large part, the proposed new rules reflect the traditional economic realities test that looks at the totality of the circumstances and focuses on the economic reality of the whole activity of a worker. Under the newly proposed rule, the central inquiry when classifying workers is whether the workers are economically dependent on the employer for work or are in business for themselves.

History of the Department of Labor’s Independent Contractor Rules

The FLSA was enacted in 1938 and provides wage and hour protections for employees but not independent contractors. The FLSA aptly defines “employer,” “employee,” and “employ.” Yet, neither the FLSA or its implementing regulations define “independent contractor.” Thus, the federal government had functioned for over 80 years without a statutory or regulatory definition of independent contractor under the FLSA. That changed in January 2021 when the Department first published a rule setting out legal standards for independent contractor classification under the FLSA.

The 2021 rule identified five factors to consider when determining whether an individual is an independent contractor. Though the factors laid out in the 2021 rule were similar to the factors in the newly proposed rule, the 2021 rule did not provide for equal balancing of all the factors. Instead, the 2021 rule designated two factors — the nature and degree of control and the worker’s opportunity for profit or loss — as “core factors” that were to carry the greatest weight in the analysis. The 2021 rule stated that the other three factors — the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the employer, and whether the work is part of an integrated unit of production — were to receive less weight. The 2021 rule was set to go into effect on March 8, 2021, but the Department delayed and then ultimately withdrew it before its effective date. In March 2022, the U.S. District Court for the Eastern District of Texas issued a decision vacating the withdrawal of the rule and holding that the 2021 rule became effective on its original effective date of March 8, 2021. The newly proposed rule seeks to rescind and replace the 2021 rule.

The Newly Proposed Rule

The newly proposed rule published last week maintains that the central inquiry when classifying workers is “whether the worker is economically dependent on the employer for work or is in business for themself.” If the worker is economically dependent on the employer for work, he or she is an employee. If the worker is in business for his or herself, he or she is an independent contractor. The rule lays out six specific factors illustrative of the economic realities of the work which help determine economic dependence:

1. Opportunity for profit or loss depending on managerial skill: Relevant inquiries under this factor include:
   • Whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work;
   • Whether the worker determines or can meaningfully negotiate the charge or pay for the work provided;
   • Whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed;
   • Whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and
   • Whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.

2. Investments by the worker and the employer: Relevant inquiries under this factor include:
   • Whether any investments by a worker are capital or entrepreneurial, including whether the investments generally support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach; and
   • Consideration of the worker’s investments relative to the employer’s investments in its overall business.

3. Degree of permanence of the work relationship: Relevant inquiries under this factor include:
   • Whether the work relationship is indefinite in duration or continuous.

4. Nature and degree of control: Relevant inquiries under this factor include:
   • Whether the employer sets the worker’s schedule, supervises the performance of the work, or explicitly limits the worker’s ability to work for others;
   • Whether the employer uses technological means of supervision — such as by means of a device or electronically), reserves the right to supervise or discipline workers, or places demands on workers’ time that do not allow them to work for others or work when they choose; and
   • Whether the employer controls economic aspects of the working relationship including control over prices or rates for services and the marketing of the services or products provided by the worker.

5. Extent to which the work performed is an integral part of the employer’s business: Relevant inquiries under this factor include:
   • Whether the function the worker performs is an integral part of the employer’s business; and
   • Whether the work they perform is critical, necessary, or central to the employer’s principal business.

6. Skill and initiative: Relevant inquiries under this factor include:
   • Whether the worker uses specialized skills to perform the work and whether those skills contribute to the business-like initiative.

The newly proposed rule makes clear that the factors are to be considered under a totality-of-the-circumstances analysis. The rule reads, “the outcome of the analysis does not depend on isolated factors but rather upon the circumstances of the whole activity.” Thus, unlike the 2021 rule, the newly proposed rule does not designate “core factors” as carrying any special weight. Rather, the rule says that “no one factor or subset of factors is necessarily dispositive, and the weight to give each factor may depend on the facts and circumstances of the particular case.” The rule also states that additional factors may be considered if those factors reflect whether the worker is in business for themself or economically dependent on the employer for work.

The Department contends that its newly proposed rule aligns with decades of judicial precedent and the Department’s longstanding guidance and that it will protect workers from misclassification.

The newly proposed rule will be open for public comment until Nov. 28, 2022.

Taft’s Employment and Labor Relations practice group will continue to monitor these developments and provide updates.