On October 13, 2022, the U.S. Department of Labor (DOL) published a Notice of Proposed Rulemaking (NPRM) to modify Wage and Hour Division regulations to revise its analysis for determining employee or independent contractor classification under the Fair Labor Standards Act (FLSA). Over the past decades, the DOL and courts have applied an economic reality test to determine whether a worker is an employee or an independent contractor under the FLSA. Although factors examined under this test varied across circuits, the ultimate question under this analysis is whether, as a matter of economic reality, the worker is either economically dependent on the employer for work (and is thus an employee) or is in business for him/herself (and is thus an independent contractor). In January 2021, the DOL reduced the primary factors the agency would consider when determining whether a worker is an independent contractor or an employee to two “core factors”, namely, the nature and degree of control over the work and the worker’s opportunity for profit or loss based on investment. These two factors under the 2021 rule are the most probative and carry greater weight in the analysis.
The DOL seeks to modify the 2021 “core factors” inquiry under the economic reality test analysis, and instead return to the totality-of-the-circumstances analysis of multiple factors in determining whether a worker is an employee or an independent contractor under the FLSA. These factors generally include the opportunity for profit or loss, investment, the degree of permanence of the work relationship, the degree of control by the employer over the worker, whether the work is an integral part of the employer’s business, and the worker’s use of skill and initiative.
The proposed rule will likely tip the scale in favor of classifying more workers as employees, as compared to the current rule. Employers who use independent contractors should carefully analyze the relationship with these workers in light of the six factors in the proposed rule. Workers who are currently classified as independent contractors under the current rule may be misclassified under the proposed rule. Misclassification of workers carries significant risks for employers. If a change to a worker’s classification brings the worker under FLSA’ s protection, an employer could face liability for unpaid wages and overtime, and liquidated damages equal to the amount owed in unpaid wages. Treble damages, which is an amount equal to two times the unpaid wages are possible too. In addition, attorney’s fees and costs may be awarded. Furthermore, misclassification carries other risks, including tax and benefits liabilities, and tort liability to third parties for injuries caused by contractors, if those workers were incorrectly classified.
The DOL has invited interested parties to submit comments regarding the NPRM by December 13, 2022 (the new deadline).