On Oct. 11, 2022, the U.S. Department of Labor (DOL) announced a proposed rule to rescind and replace its 2021 independent contractor classification rule under the Fair Labor Standards Act (FLSA). The proposal was published in the Federal Register on Oct. 13, 2022. Comments on the proposal must be submitted by Nov. 28, 2022.
Whether a worker is covered or protected by the FLSA depends on whether the worker falls within the FLSA’s definition of “employee.” The DOL has traditionally favored using the five-factor economic realities test (ERT) to classify workers as either employees or independent contractors.
Economic Realities Test
The factors used in the ERT are:
The nature and degree of control over the work;
The worker’s opportunity for profit or loss based on initiative and/or investment;
The amount of skill required for the work;
The degree of permanence of the working relationship; and
Whether the work is part of an integrated unit of production.
The 2021 Rule
The DOL issued the 2021 independent contractor classification final rule on Jan. 7, 2021. While the 2021 rule continued using the ERT to classify workers, the rule designated two factors—the nature and degree of control over the work and the worker’s opportunity for profit or loss—as “core factors,” having more probative value and carrying greater weight than the other factors.
If the rule is adopted, employers need to consider the “totality of the circumstances” in their worker classification efforts.
With this proposed rule, the DOL would return to the pre-2021 rule precedent and allow employers to consider all five ERT factors equally. If the rule is adopted, employers need to consider the “totality of the circumstances” in their worker classification efforts.
Impact on Employers
Employers should continue to monitor this development and consider how they may need to update their worker classification procedures if this proposal is finalized and adopted.
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This Legal Update is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.