Department of Labor’s Notice of Proposed Rulemaking – Independent Contractor Classification Under the Fair Labor Standards Act
The Department of Labor is seeking public comment on or before November 28, 2022, regarding its proposed changes to the classification of independent contractors under the Fair Labor Standards Act.
Fair Labor Standards Act
The FLSA establishes minimum wage, overtime pay, and payday standards, in addition to recordkeeping obligations and other workplace mandates. Importantly, the FLSA only places requirements on the employer-employee relationship. Thus, the FLSA does not apply to work performed by independent contractors.
The 2021 Independent Contractor Rule
In January 2021, the Department of Labor (Department) published the current rule (2021 Rule) for classifying a worker as an employee or independent contractor. Traditionally, courts have applied one of several variations of an “economic reality” test to determine whether an individual is economically dependent on a company for work and, thus, employed by the company. The 2021 Rule sought to simplify the test and provide uniformity across the circuits.
The 2021 Rule identified five factors as relevant to an economic reality test: (1) the nature and degree of control over the work; (2) the worker’s opportunity for profit and loss; (3) the amount of skill required for the work; (4) the degree of permanence of the working relationship between the worker and employer; and (5) whether the work is part of an integrated unit of production. The 2021 Rule placed particular emphasis on the first two factors, labeling them “core factors,” and noted that it is highly unlikely that other factors could ever outweigh the combined value of the core factors. Also, the 2021 Rule narrowed the scope of control to the actual practice of the business as opposed to unexercised contractual authority.
While the Department attempted to withdraw the 2021 Rule, a federal district court decided that the effective date of the 2021 Rule was March 8, 2021. The 2021 Rule remains in effect until the current Notice of Proposed Rulemaking (NPRM) is promulgated as a final, effective rule.
The NPRM seeks to rescind the 2021 Rule. The main changes that the Department is seeking to implement are as follows:
- First, the NPRM eliminates the heightened value placed on the 2021 Rule’s “core factors.” So, the NPRM will return to a more complete “totality of the circumstances” analysis.
- Second, in addition to the five factors expressed in the 2021 Rule, the NPRM reinstates “investments by the worker and the employer” as a standalone factor.
- Third, the NPRM includes unexercised contractual authority as relevant to the control analysis.
- Fourth, the Department changes the “integral” factor from asking “whether the work is part of an integrated unit of production” to determining the “extent to which the work performed is an integral part of the employer’s business.” In essence, the NPRM returns to asking whether the work performed is critical, necessary, or central to the employer’s business.
- Fifth, in addition to analyzing the skill required, the NPRM asks whether the worker exercises initiative to operate as an independent business (or, stated differently, has independent business judgment when performing the job).
As expressed by the Department, it believes that the 2021 Rule improperly constrains the economic reality test and, thus, will lead to the misclassification of certain workers as independent contractors. As a result, employers should expect that, when the NPRM becomes a final regulation, more workers will be classified as employees for FLSA purposes.
The Board is seeking public comment on the NPRM, which can be found in the Federal Register published on October 13, 2022. Public comments must be received by the Board on or before November 28, 2022.
Employers should expect the regulation to be substantially similar to the NPRM. The estimated date for the regulation to take effect is late 2023 to early 2024. Therefore, employers should prepare for the classification of workers as an employee or independent contractor to return to a position similar to the one expressed before the 2021 Rule before that time period.