Last month, The Department of Labor (DOL) proposed a new test to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The rule would rescind a prior rule that took effect in January 2021.
The proposed rule would focus on a totality-of-the-circumstances analysis of the “economic realities test” to determine whether the worker is economically dependent on the employer or is in business for themselves. The DOL provides the following factors as guidance to determine the worker’s classification:
- Opportunity for profit or loss depending on managerial skill.
- This factor considers whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work.
- Investments by the worker and the employer.
- This factor considers whether any investments by a worker are capital or entrepreneurial in nature.
- Degree of permanence of the working relationship.
- This factor weighs in favor of the worker being an employee when the working relationship is indefinite or continuous. This factor weighs in favor of the worker being an independent contractor when the working relationship is definite in duration, non-exclusive, project-based, or sporadic.
- Nature and degree of control by the employer over the worker.
- Facts relevant to the employer’s control over the worker 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.
- Extent to which the work performed is an integral part of the employer’s business.
- This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the employer’s principal business. This factor weighs in favor of the worker being an independent contractor when the work they perform is not critical, necessary, or central to the employer’s principal business.
- Skill and initiative.
- This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the employer to perform the work.
The DOL indicates that additional factors may be considered if they are indicative of whether the worker is economically dependent on the employer or in business for themselves.
The DOL has extended comments on the rule through the end of November, 2022.
What should employers do?
Under the proposed rule, workers who were considered independent contractors under the 2021 rule may now be considered employees. If the proposed rule is implemented, employers should analyze independent contractors to ensure they are properly classified.