DOL Proposes New Independent Contractor Rule

The U.S. Department of Labor (DOL) has proposed a new rule to determine whether a worker is an independent contractor or an employee under the Fair Labor Standards Act (FLSA). This proposal seeks to rescind the rule issued during the Trump Administration and will make it harder to establish an independent contractor relationship under federal wage and hour laws.

The independent contractor classification is important to many industries and businesses, including those using a “gig” or “app-based” model, such as Uber and DoorDash. But independent contractors are not entitled to overtime or minimum wage under the FLSA, and the DOL is highly focused on “combatting” the misclassification of employees as independent contractors.

The new proposed rule and the rule issued during the Trump Administration both use a version of the “economic reality test.” This test seeks to determine whether a worker is economically dependent on an employer or whether the worker is in business for themself. The difference between the former rule and the new proposed rule is in how the economic reality test is applied.

The new rule proposes a broad, expansive approach that will look at the parties’ actual practices and their contractual arrangements to evaluate the following factors:

• Opportunity for profit or loss depending on managerial skill that affects the worker’s economic success or failure in performing the work;
• Capital or entrepreneurial investments borne by the worker relative to the employer’s investments; 
• Degree of permanence of the working relationship;
• Nature and degree of control exercised by the employer over meaningful economic aspects of the work relationship, such as scheduling, supervision, pricing, and the worker’s ability to work for others;
• Extent to which the work performed is an integral part of the employer’s business; and
• Whether a worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative that is consistent with the worker being in business for themself instead of being economically dependent on the employer.

The public is invited to submit comments on the proposed rule by November 28, 2022.

Determining whether a worker is an independent contractor or an employee is a complicated analysis under both federal and state law. Because misclassification can lead to significant liability, we encourage any employer using or considering using independent contractors to consult with legal counsel for assistance. KZA attorneys are always available to guide you through this analysis.

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.