DOL Issues Highly Anticipated Proposed Rule for Independent Contractor Classification

As was expected, the U.S. Department of Labor (DOL) issued a new proposed rule on Employee or Independent Contractor Classification under the Fair Labor Standards Act (FLSA) on October 13. The DOL explained in its announcement of the proposed rule that the change is meant to combat misclassification of employees as independent contractors and protect employees’ rights under federal labor standards. Importantly, the DOL states that it “believes [the agency] is legally constrained from adopting an ABC test” that has proved so controversial in California.

This proposed rule would make it harder for businesses of all types, including agencies, to classify workers as independent contractors under federal wage and hour laws and increases the risk that some of their workers are misclassified. Such a rule change could impact the use of freelance talent depending on the circumstances of their engagement.

As written, the proposed rule would revert back to the previous interpretation of the “economic reality test” factors (as was developed under the Obama Administration) with a few tweaks. It would rescind the Trump-era 2021 Independent Contractor Rule, which placed greater importance on two of the factors—employer right to control over a worker’s work and opportunity for profit and loss. Instead, it would reinstate the multifactor totality-of-the-circumstances assessment to the worker classification analysis, with no factor or set of factors having a greater or predetermined weight.

The economic reality test factors include:

• The extent to which the services rendered are an integral part of the principal’s business.
• The permanency of the worker relationship.
• The amount of the alleged contractor’s investment in facilities and equipment.
• The nature and degree of control by the principal business.
• The alleged contractor’s opportunities for profit and loss.
• The skill and initiative involved in performing the work.
• The degree of independent business organization and operation.
• Additional factors (noting that “the enumerated factors are not to be applied mechanically but should be viewed along with any other relevant facts in light of whether they indicate economic dependence or independence”).

Additionally, the DOL’s proposed rule would clarify and expand on existing factors by:

• Providing additional analysis of the “control” factor by including detailed discussions of how scheduling, supervision, price-setting, and the ability to work for others should be considered; and
• Returning to the “longstanding” interpretation of the “integral” factor by expanding the analysis to whether the work is integral to the employer’s business, rather than an integrated unit of production.

Agencies who want to ensure their freelancers stay classified as independent contractors may consider changing their policies or practices to improve their chances of satisfying the new test for independent contractors. Agencies who are concerned about the increased risk that some of their employees may be misclassified as independent contractors under the new rule may begin assessing how to transition those workers to employee status (such as to a part time W-2, non-benefit employee), including changes to time tracking, pay and benefits. Agencies that reserve the right to control certain aspects of the work done by freelancers— even if they don’t actually exercise that control — could be found to have an employee relationship with the freelancer. The DOL claims the Trump Administration downplayed “the employer’s reserved right or authority to control the worker” and took the position that “the right of the employer to supervise at its discretion is evidence of control, even if the employer rarely exerts supervision.”

Initially, the agency issued a 45-day public comment period through November 28. On October 25, 2022, the U.S. Department of Labor’s (DOL) Wage and Hour Division announced a 15-day extension of the public comment period through December 13, 2022. A new rule is likely to go into effect in early 2023.

Learn more about 4A’s advocacy on the federal independent contractor rule here.

Have questions about federal employee classification issues and/or the proposed independent contractor rule? Contact Amanda Anderson.