New rule proposed to determine independent contractor vs. employee status 

The Department of Labor (DOL) announced a proposed rule that would revise how to determine if an individual is an independent contractor or an employee entitled to minimum wage, overtime and other protections under the federal Fair Labor Standards Act (FLSA). The proposal would rescind the 2021 Trump administration rule (GRIST) and create a framework that is “more consistent with longstanding judicial precedent on which employers have relied to classify workers as employees or independent contractors under the FLSA,” says DOL. Comments on the proposal can be submitted until Nov. 28, 2022.

Highlights

• Align DOL’s approach with courts’ FLSA interpretation and the economic reality test. Under the economic reality test, the consideration is whether the worker is either economically dependent on the employer for work (an employee), or is in business for themselves (an independent contractor).
  
  
• Restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA.
  
  
• Analyze all factors without assigning a predetermined weight to a particular factor or set of factors.
  
  
• Revert to the longstanding interpretation of the economic reality factors. The following six factors are proposed, but other additional factors may be considered and relevant:
  •  Opportunity for profit or loss depending on managerial skill
  • Investments by the worker and the employer
  • Degree of permanence of the work relationship
  • Nature and degree of control
  • Extent to which the work performed is an integral part of the employer’s business
  • Skill and initiative
     
• Assist with the proper classification of employees and independent contractors under the FLSA. DOL believes this proposal would help protect workers from misclassification and recognize that independent contractors serve an important role in our economy, providing a consistent approach for those businesses that engage (or wish to engage) independent contractors.
  
  
• Rescind the 2021 Independent Contractor Rule. The rule would have made it easier for businesses to classify workers as independent contractors rather than employees.

Gig companies (ride-share, construction trucking and other industries) were concerned about the impending proposal’s effect on their businesses, but the changes do not appear to be as significant as anticipated. For example, Uber reportedly said DOL “listened to drivers, who consistently and overwhelmingly state that they prefer the unique flexibility that comes with being an independent contractor” and the proposal takes a “measured approach essentially returning us to the Obama era, during which our industry grew exponentially.” In addition, Lyft said, “there is no immediate or direct impact on the Lyft business at this time.”  
 

Related resources

Non-Mercer resources

• Proposed rule (Federal Register, Oct. 13, 2022)
• Press release (DOL, Oct. 11, 2022)

Mercer Law & Policy resource

• DOL, NLRB weigh employee vs. independent contractor status (March 9, 2021)