Yesterday, the U.S. Department of Labor (DOL) published a proposed rule that adopts a six step economic realities test for determining whether a worker is an independent contractor or not. Publication of this rule will rescind the Trump-era rule narrowing the definition of independent contractor.

This new rule is expected to significantly increase the number of workers considered employees rather than independent contractors. The Biden Administration is doing this for many reasons. Independent contractors do not get employer benefits and also do not have to receive minimum wage and overtime pay guarantees. This new rule will also expand the number of workers that employers will have to collect payroll taxes on and that unions can organize more effectively.

There is no statutory definition of independent contractor. Therefore, courts have developed an “economic reality” analysis that looks at the worker’s economic dependence on the employer to determine whether a worker may actually be employed or is an independent contractor. The U.S. Department of Labor has relied on this economic reality analysis more or less since a 1949 Supreme Court decision. However, in 2019, the Trump Administration’s Department of Labor issued a rule establishing a more streamlined analyses that laid out a broader set of guidelines to what is an independent contractor.

The Biden Administration had the USDOL withdraw that rule and has been working on a new rule that better aligns the independent contractor analysis with judicial precedent. The new proposed rule affects a totality-of-the-circumstances analyses where all analyses factors are relevant and no longer, as the Trump 2021 rule did, assign any of the factors a predetermined weight.

The proposed factors in the proposed rule are:

• Opportunity for profit or loss depending on managerial skill
• Investment by the worker and the employer. Did the worker make any investment in capital or that is entrepreneurial in nature?
• The degree of permanence of the work relationship.
• The nature and degree of control that the “employer” has (including reserved control) over the performance of work.
• The extent to which the work performed is an integral part of the employer’s business.
• Does the worker use specialized skills to perform the work and do those skills contribute to a business-like initiative?

The rule also lists additional factors that may be considered if the factors in some way indicate whether the worker may be in business for themselves as opposed to being economically dependent on the employer for work.

More information on this will be published when it becomes available. Interested parties have until November 28, 2022, to provide comments to the DOL.

Source:  Notice of Proposed Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act, RIM 1235-AA43. (10/11/22)