Independent Contractor Today, Employee Tomorrow?

UPDATE – On October 25, 2022, the Department of Labor extended the comment period by 15 days, so individuals and entities wanting to comment on the proposal now have until December 13, 2022 to submit comments.

On October 11, 2022, The U.S. Department of Labor (“DOL”) proposed a new rule which, if passed, would redefine which workers are considered “employees,” and which workers qualify as “independent contractors” under the Fair Labor Standards Act (FLSA).

The FLSA requires that employees receive at least the minimum wage for all time worked and overtime pay for hours over 40 in a workweek unless they qualify as an exempt employee. Independent contractors, on the other hand, are not “employees” under the FLSA, and thus are not legally required to receive at least the minimum wage or overtime under that statute. However, independent contractors typically enjoy more freedom – they may work for multiple employers at once, they have more control over their work schedules and they often negotiate their own terms of pay.

In January 2021, the DOL published employer-friendly guidance that redefined who was considered an employee and who was considered an independent contractor. That provision, which is still in effect, makes it easier to define a worker as an independent contractor than prior approaches. It uses five factors that focus on “economic reality.”^[1] Two of the five factors are considered the “core factors” and are the most crucial in making the decision. Those two core factors are: (1) the nature of the work and (2) the worker’s opportunity for profit or loss.^[2] The remaining three factors are: (3) the amount of skill required for the position, (4) the permanence of the working relationship and (5) whether the work is an “integrated unit of production.”^[3]

The DOL’s October 11, 2022 proposal would use a “totality-of-the-circumstances” test to determine who is an independent contractor. ^[4] The bottom line of the test would be to determine “whether a worker is in business for themself or is instead economically dependent on the employer for work.”^[5]  Under this test, similar economic reality factors are considered, but they “are not assigned a predetermined weight, and each factor is given full consideration.”^[6] Thus, the factors that would be considered if the proposed rule passes are as follows:

1. The Opportunity for Profit or Loss Depending on Managerial Skill.^[7] A worker may be an independent contractor if the worker can (a) exercise initiative or (b) manage their investment or capital on helpers, equipment or material.^[8]
2. Investments by the Worker and the Employer.^[9] Investments are treated as a “standalone factor” under the proposed rule.^[10] If the worker makes “capital or entrepreneurial” investments, they may be considered an independent contractor. The worker’s investments that are based on regular performance of a job, such as tools and equipment, do not apply.^[11]
3. Degree of Permanence of the Work Relationship.^[12] The worker may be an independent contractor if they are not hired indefinitely but are hired for a fixed period of time.^[13]
4. Nature and Degree of Control.[14] The worker may be an independent contractor if the worker has their own business.^[15]
5. Extent to Which the Work Performed is an Integral Part of the Employer’s Business.^[16] The worker may be an independent contractor if their work is not an “integral part” of the employer’s business.^[17]
6. Skill and Initiative.^[18] A worker may be an independent contractor if the work requires “specialized training or skill that the potential employer does not provide.”^[19]

This proposed rule would likely reclassify many independent contractors as employees. U.S. Labor Secretary Marty Walsh argued that this reclassification is important because “Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages.”^[20] According to the DOL, the proposed rule would also align more closely with historical case law.^[21]

The proposed rule is currently in a 45-day public comment period.^[22] The final rule, if passed, would be implemented mid-2023, at the earliest, and court challenges to it are likely.^[23] In fact, there is a possibility that this proposed rule will be blocked in court and may never come to fruition.

Please contact your Varnum attorney, or any member of the firm’s labor and employment practice team, with questions about how this proposed change may affect your workforce.

First year associate Rebecca Fadler contributed to this advisory.

_{[1] 2021 IC Rule.}

_{[2] Id.}

_{[3] Id. at 1247 (§ 795.105(d)(2)).}

_{[4] 87 Fed. Reg. 197 (Oct. 13, 2022).}

_{[5] Id. at 62236, (citing Cornerstone Am., 545 F.3d at 343; Flint Eng’g, 137 F.3d at 1440; Superior Care, 840 F.2d at 1059).}

_{[6] Id. at 62220.}

_{[7] Id. at 62237}

_{[8] Id.}

_{[9] Id. at 62240.} 

_{[10] Id.}

_{[11] Id.}  

_{[12] Id. at 62243.}

_{[13] Id.}

_{[14] Id. at 62246.}

_{[15] Id.}  

_{[16] Id. at 62253.}

_{[17] Id.}

_{[18] Id. at 62254.}

_{[19] Id.}

_{[20] Daniel Wiessner, Nadita Bose, David Shepardson, Biden labor proposal shakes up gig economy that relies on contractors, Reuters (Oct 11, 2022).}

_{[21] US Department of Labor Announces Proposed Rule on Classifying Employees, Independent Contractors; Seeks to Return Longstanding Interpretation, U.S. Dep’t of Labor; https://www.dol.gov/newsroom/releases/WHD/WHD20221011-0.}

_{[22] Wiessner, supra note 20.}

_{[23] Id.}