EMPLOYEE OR INDEPENDENT CONTRACTOR? DOL, AGAIN, PROPOSES NEW RULE

October 12, 2022 by

John Freeman,

One of the most difficult, and consequential, decisions an employer must make is whether to classify a worker as an employee or an independent contractor. And, it matters, a lot. Both to the employer and to the employee. If the worker is an employee, the employer must pay the worker at least a minimum wage, overtime and other benefits as required under the Fair Labor Standards Act (FLSA). On the other hand, if a worker is an independent contractor, the employer pays the worker in accordance with whatever agreement the worker and the business owner negotiate. Although the Department of Labor (DOL) promulgated a new rule in January, 2021, addressing the issue, as we previously reported, the DOL on October 11, 2022, announced it will publish a new rule on October 13, 2022, that will have new guidelines for determining whether a worker is an employee or independent contractor.

I. THE PROPOSED RULE’S SIX FACTORS CHANGES THE PRESENT RULE

The present rule has several factors to consider in making the classification as to whether a worker is an employee or independent contractor, but there are two core factors—control of the work and opportunity for profit or loss—which carry greater weight over other factors.

The proposed rule, which the DOL states in its announcement, makes “economic dependance as the ultimate inquiry” and imposes the “economic reality test” with six factors, or guides, to make a “totality-of-the circumstances analysis” to assess the economic realities of the working relationship. In contrast to the present rule, “no one factor or subset of factors is necessarily dispositive, and the weight to give each factor may depend on the facts and circumstances of the particular case.” And, the six factors are not exhaustive and additional factors may be relevant if those factors “in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the employer for work.” The six factors are:

1. Opportunity for profit or loss depending on managerial skill. An independent contractor relationship would include if the worker can meaningfully negotiate the charge or pay, accepts or declines jobs, chooses the order or time for the job, markets or advertises the work, hires others, purchases materials and equipment and/or rents space.
2. Investments by the worker and the employer. The worker’s investments, as an independent contractor, should support an independent business or serve a business-like function, and reflect the investments are capital or entrepreneurial in nature, as opposed to costs borne by a worker to perform the job (e.g. tools and equipment).
3. Degree of permanence of the work relationship. This factor weighs in favor of an independent contractor classification if the work relationship is definite in duration, non-exclusive, project based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities. In contrast, if the work is indefinite in duration or continuous, the factor weighs in favor of a worker being an employee.
4. Nature and degree of control. Control over the worker’s schedule, the performance of the work, explicit limits on working for others, discipline of the worker and control over rates for services, indicate an employee relationship. Less indicia of control, favors an independent contractor relationship.
5. Extent to which the work performed is an integral part of the employer’s business. This vague factor weighs in favor of the worker being an employee if the work performed is critical, necessary, or central to the employer’s principal business, but it does not depend on whether any individual worker in particular is an integral part of the business. Given that all work is to some extent critical or necessary, this factor may be difficult to apply.
6. Skill and initiative. If the worker brings specialized skills to the work relationship in connection with business-like initiative, an independent contractor relationship is indicated. This factor would weigh in favor of an employee relationship if the worker does not use specialized skills or depends on training from the employer to perform the work.

II. IMPACT ON EMPLOYERS

The present rule is more straightforward and more easily applied. Although each worker’s relationship is to be analyzed under either the present rule or under the proposed rule, if the proposed rule is adopted, an employer’s determination of the worker’s classification may be more difficult and involve more analysis. We are prepared to assist in making that analysis and would welcome the opportunity to serve you. And, we are tracking the progress of the proposed rule for future posting.

III. COMMENTS PERIOD

After the proposed rule is published on Thursday, October 13, 2022, employers have 45 days to provide comments to the DOL. You may make your comments directly to the DOL at https://www.regulations.gov and follow the instructions to make comments, or we will be glad to relate your comments or concerns to the DOL as to how the proposed rule may impact your particular business.

John L. Freeman

john@brownfoxlaw.com

An AV-rated litigator, Mr. Freeman’s primary areas of practice are employment law, civil litigation and related areas of business litigation. He regularly advises clients regarding employment law practices, non-competes, discrimination and other employment related matters. In 2023, the State Bar…Read More

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