DOL Proposes Return to “Economic Realities” Test for Independent Contractor Classification Determinations

On October 11, 2022, the Department of Labor (the “DOL”) announced a Proposed Rule that would reinstate the “economic realities” test for analyzing whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (the “FLSA”). Under the Proposed Rule, the ultimate inquiry would be whether, as a matter of economic reality, a worker is either economically dependent on an employer for work, or is in business for himself as an independent contractor, using a six-factor totality of the circumstances test.

The Proposed Rule would rescind a January 2021 rule, which narrowly focuses on two of five economic realities test factors—the employee’s nature and degree of control over the work, and the worker’s opportunity for profit or loss. Our memorandum addressing the January 2021 rule is available here.

The public will have 45 days to comment on the Proposed Rule after its scheduled October 13, 2022 publication in the Federal Register.

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Background

In January 2021, during the final days of the Trump Administration, the DOL published a final rule updating longstanding guidance regarding the classification of independent contractors under the FLSA (the “January 2021 Rule”). Among other things, the January 2021 Rule identified two “core factors” that were most probative of whether a worker was an employee or an independent contractor: the employer’s nature and degree of control over the work, and the worker’s opportunity for profit or loss.

Four days before the January 2021 Rule would have become effective, however, the DOL (now under the Biden Administration) published a rule delaying its effective date, and later published another rule withdrawing it altogether (the “Delay and Withdrawal Rules”). Litigation ensued challenging the Delay and Withdrawal Rules, and a federal district court in Texas ultimately vacated both, restoring the January 2021 Rule. That decision was appealed to the Fifth Circuit, but the appeal was stayed at the request of the DOL, to allow the DOL time to announce the current rulemaking.

The October 2022 Proposed Rule

In its announcement the DOL stated that the Proposed Rule provides “a framework more consistent with longstanding judicial precedent on which employers have relied to classify workers as employees or independent contractors under the FLSA” by, among other things, “align[ing] the department’s approach with courts’ FLSA interpretation and the economic reality test,” “[r]estor[ing] the multifactor, totality-of-the-circumstances analysis,” and “[e]nsur[ing] that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.”
Under the Proposed Rule, a six factor “economic reality” test is used to determine whether a worker is economically dependent on an employer for work (an employee), or in business for themselves (an independent contractor). The test is a totality of the circumstances test, meaning that the outcome does not depend on any specific factor. The factors are described below:

1. Opportunity for Profit or Loss Depending on Managerial Skill. This factor considers whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work. Considerations include whether the worker can negotiate the charge or pay; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space. If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee. Some decisions by a worker that can affect the amount of pay that a worker receives, such as the decision to work more hours or take more jobs, generally do not reflect the exercise of managerial skill indicating independent contractor status under this factor.
2. Investments by the Worker and the Employer. This factor considers whether any investments by a worker are capital or entrepreneurial in nature. Costs borne by a worker to perform their job (e.g., tools and equipment to perform specific jobs and the workers’ labor) are not evidence of capital or entrepreneurial investment and indicate employee status. Investments that are capital or entrepreneurial in nature and thus indicate independent contractor status generally support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach. Additionally, the worker’s investments should be considered on a relative basis with the employer’s investments in its overall business. The worker’s investments need not be equal to the employer’s investments, but the worker’s investments should support an independent business or serve a business-like function for this factor to indicate independent contractor status.
3. Degree of Permanence of the Work Relationship. This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration or continuous, which is often the case in exclusive working relationships. This factor weighs in favor of the worker being an independent contractor when the work relationship is definite in duration, nonexclusive, project-based, or sporadic based on the worker being in business for themselves and marketing their services or labor to multiple entities. This may include regularly occurring fixed periods of work, although the seasonal or temporary nature of work by itself would not necessarily indicate independent contractor classification. Where a lack of permanence is due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ, rather than the workers’ own independent business initiative, this factor is not indicative of independent contractor status.
4. Nature and Degree of Control. This factor considers the employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship. Facts relevant to the employer’s control over the worker include whether the employer sets the worker’s schedule, supervises the performance of the work, or explicitly limits the worker’s ability to work for others. Additionally, facts relevant to the employer’s control over the worker include whether the employer uses technological means of supervision (such as by means of a device or electronically), reserves the right to supervise or discipline workers, or places demands on workers’ time that do not allow them to work for others or work when they choose. Whether the employer controls economic aspects of the working relationship should also be considered, including control over prices or rates for services and the marketing of the services or products provided by the worker. Control implemented by the employer for purposes of complying with legal obligations, safety standards, or contractual or customer service standards may be indicative of control. More indicia of control by the employer favors employee status; more indicia of control by the worker favors independent contractor status.
5. Extent to Which the Work Performed is an Integral Part of the Employer’s Business. This factor considers whether the work performed is an integral part of the employer’s business. This factor does not depend on whether any individual worker in particular is an integral part of the business, but rather whether the function they perform is an integral part. This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the employer’s principal business. This factor weighs in favor of the worker being an independent contractor when the work they perform is not critical, necessary, or central to the employer’s principal business.
6. Skill and Initiative. This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the employer to perform the work. Where the worker brings specialized skills to the work relationship, it is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.

Under the Proposed Rule, additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themselves, as opposed to being economically dependent on the employer for work.

Comments on the Proposed Rule may be submitted here, between October 13 and November 28, 2022.