The distinction between who is an employee and who is an independent contractor has been a frequent litigation issue ever since the Fair Labor Standards Act (FLSA) was passed in 1938. For the eight decades following its passage, the Department of Labor (DOL) refused to issue a formal regulation on the matter until the Trump administration finally announced formal rules in 2021. Now, the Biden administration wants to replace the 2021 rule with its own rule regarding contractor status. The new proposed rule would arguably make it harder to classify workers as independent contractors as opposed to employees. 

The Proposed Rule

In this new regulation, the DOL states that what separates employees and independent contractors is that the worker, as a matter of economic reality, is either “economically dependent on the employer for work or in business for themselves”. To determine which category a worker fits, the DOL sets forth six nonexclusive factors. While these factors are not new, the way the DOL has interpreted them in this proposed rule rejects recent federal appellate authority finding independent contractor status.

Factor 1: Opportunity for profit or loss depending on managerial skill

This factor concerns how much control a worker has over how they manage their work. For instance, if they can do things like set or negotiate his pay, accept or decline jobs, hire others, or purchase materials, the worker will probably be classified as an independent contractor. 

Factor 2: Investments by the worker and the employer

This factor considers the amount of investment both the worker and the employer make. “Capital or entrepreneurial” investments that increase a worker’s ability to do more work or different types of work, reduce costs, or extend market reach are indicative of contractor status. Investing in tools to do the job, on the other hand, indicates employee status.

Factor 3: Degree of permanence of the work relationship

According to this factor, when the circumstances of the working relationship are indefinite or continuous, it would indicate an employee status. Only when the work has a defined duration or is nonexclusive, based on a project, or sporadic does it indicate contractor status. 

Factor 4: Nature and degree of control

This factor looks at the degree of control the worker and the employer have over the work as well as the economic aspects of the work relationship. Under the proposed rule, it’s important to note that control that is reserved but not practiced will still count as control. Any control exercised for the purpose of complying with legal, safety, contractual, customer service standards is also considered control. 

Factor 5: Extent to which the work performed is an integral part of the employer’s business

This factor weighs the importance of the work done. When the work a worker does is considered to be “critical, necessary, or central to the employer’s principal business”, it would indicate employee status. 

Factor 6: Skill and initiative

This factor considers whether the worker uses any “specialized skills” to do their job, and if so, whether those skills contribute to a “business-like initiative”. In the explanation for this factor, the “specialized skills” aren’t skills required to work in a given field (such as IT, healthcare, or sales). Instead, the DOL seems to be referring to skill in running a business. 

How Would this Rule Affect Working Relationships? 

There are still many questions around the DOL’s interpretation of these six factors. For instance, regarding the second factor, how can the worker’s level of investment be compared to the employer’s level of investment? In the vast majority of cases, a business will invest more than an individual worker could. The fifth factor also presents confusion. What sorts of jobs could contractors do that wouldn’t be considered “critical, necessary, or central to the employer’s principal business” exactly? It would seem that any job a contractor has hired for could be considered necessary or even critical to a business. 

Before this regulation goes into effect, it’s important that businesses receive clarification on the many questions they’re sure to have surrounding these six factors. If a contractor is in fact reclassified as an employee under this new rule, that would make them entitled to benefits under the FLSA, such as minimum wage and overtime. However, the new rule would not not directly affect contractor classification in states like California that have implemented their own criteria for classifying contractors and employees. 

If this new proposed rule goes into effect, the result will likely be more contractors being reclassified as employees. While there are certainly many contract workers being wrongly classified currently, there are also many contractors who could be reclassified under this rule who wouldn’t want to be employees. From the perspective of employers, if they’re required to hire workers as employees rather than contractors, this could become too expensive for them to maintain, forcing them to eliminate the job altogether. In such a scenario, both the business and the worker would suffer. 

The proposed rule was officially published in the Federal Register on Oct. 13, 2022, and we’re currently in the 45-day public comment period. Employers interested in explaining the effect the proposed rule would have on their businesses have until November 28, 2022, to submit any feedback to the DOL.

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A key part of complying with labor regulations is being able to prove your activities. Learn how CompanyMileage helps you do just that by requesting a demo today.