It's a delicate issue for employers, workers and the government: Who is an employee and who is an independent contractor?
In an office setting, this is a pretty simple equation. But in industries where all sorts of workers are relied upon, whether it be full-time, permanent employees, seasonal workers or subcontractors, this dilemma becomes more complex. In the construction industry, should subcontractors be considered employees?
These are the types of questions the U.S. Department of Labor (DOL) is taking on with its latest proposed rule. On Thursday, Oct. 13, the DOL will publish its Notice of Proposed Rulemaking, which was created to help employers determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The notice states that the federal government is trying to return to the original intent of the Fair Labor Standards Act, which was created to improve workers' rights. The FLSA established a minimum wage, overtime pay eligibility, child labor rules and more. The FLSA requires employers to pay non-exempt employees at least minimum wage for their first 40 hours of work a week, and overtime pay for additional time.
The proposed rule seeks to better define what an independent contractor is, and to determine the employment relationship between the independent contractor and their "employer" or client. To do so, it needs to be determined whether the independent contractor is economically dependent upon the employer. The government uses several factors to determine whether this condition exists, including the degree of control by the employer over the worker, a worker's opportunity for profit or loss, whether the work is integral part of the business, among others.
In recent years, the federal government had narrowed the definition of these terms and the analysis of how classification was determined. The DOL is proposing a return to the more generalized, original approach to defining whether a worker is an employee or an independent contractor, using a "totality of the circumstances analysis" instead of a newer, "core factors" test, which has been used more recently. The core factors test, which was part of a rule change in 2021, known as the "2021 IC Rule," has created confusion in the workplace and in courtrooms, therefore the DOL wants to change it back.
For example, in the court case Cromwell v. Driftwood Electrical Contractors, Inc., the Fifth Circuit said the 2021 IC Rule determined the worker had independent contractor status because the workers “invested a relatively substantial amount in their trucks, equipment, and tools” but that their opportunity for profit or loss was “severely limit[ed].” Meanwhile, in Scantland v. Jeffry Knight, Inc., the Eleventh Circuit found that the opportunity for profit or loss factor “point[ed] strongly toward employee status,” although the investment factor weighed slightly in favor of independent contractor status. Confusing, right?
Basically the DOL is saying that the 2021 IC Rule leaves the definition up to too much definition.
According to the DOL, the proposed rule would provide guidance on classifying workers and seeks to combat employee misclassification, which is important because misclassification denies workers’ rights and protections under federal labor standards, promotes wage theft, allows certain employers to gain an unfair advantage over law-abiding businesses, and hurts the economy at-large.
“While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers,” said Secretary of Labor Marty Walsh. “Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages. The Department of Labor remains committed to addressing the issue of misclassification.”
Specifically, the proposed rule would do the following:
- Align the department’s approach with courts’ FLSA interpretation and the economic reality test.
- Restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA.
- Ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
- Revert to the longstanding interpretation of the economic reality factors. These factors include the investment, control and opportunity for profit or loss factors. The integral factor, which considers whether the work is integral to the employer’s business, is also included.
- Assist with the proper classification of employees and independent contractors under the FLSA.
- Rescind the 2021 Independent Contractor Rule.
The DOL encourages all stakeholders to participate in the regulatory process. Comments, which must be submitted from Oct. 13 to Nov. 28, 2022, should be submitted online or in writing to the Division of Regulations, Legislation and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Ave. NW, Washington, D.C. 20210.
