New Rule Proposed for Independent Contractor vs. Employee Status

On October 13, 2022, the U.S. Department of Labor (“DOL”) formally proposed a new rule, which would alter the existing test and factors to be used nationwide in determining whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (“FLSA”), resulting in more independent contractors being classified as employees.

Once the new rule is finalized, it will become the nationwide standard for determining whether a worker is an employee or an independent contractor under the FLSA. The rule does not alter the existing FLSA exemptions for executive, administrative, and professional employees, and does not alter state laws (such as California’s ABC test) which may have more stringent requirements for independent contractor status. The summary of the proposed rule says that the DOL considered adopting the stringent ABC test for independent contractor status, but chose not to because it did not believe it had the authority to do so under the FLSA.

Economic Reality Test

Both the existing rule and the new proposed rule use the “economic reality” test as the basis for whether a worker is an employee or an independent contractor. Specifically, the economic reality test considers whether a worker is: (1) in business for him/herself (thus, an independent contractor); or (2) economically dependent on an employer for work (thus, an employee).

The DOL’s new proposed rule uses six factors, all of which have equal weight: (1) opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the employer; (3) degree of permanence of the work relationship; (4) nature and degree of control; (5) extent to which the work performed is an integral part of the employer’s business; and (6) skill and initiative. Whether a worker is an employee or an independent contractor is based on the “totality of the circumstances,” after consideration of these six factors. The new proposed rule would result in turning more workers in the gig economy that have been viewed as independent contractors under existing law into employees.

The IRS has its own test regarding whether a worker is an independent contractor or an employee, and the proposed new rule will not change this. Thus, employers should not only analyze a worker’s status based on the DOL test above, but under the IRS test also.

Benefits Considerations

In its summary of the January 2021 rule, the DOL explained it was possible for employers to provide access to fringe benefits to independent contractors without changing the worker’s status to an employee. That was a change from historical practices. The DOL’s proposed new rule does not prohibit providing fringe benefits to independent contractors; however, the summary of the proposed rule notes that because a higher percentage of employees receive fringe benefits than do independent contractors, the rule is likely to increase the overall number of workers who receive fringe benefits by reducing the number of workers classified as independent contractors.

Watchful Eye

Companies with independent contractors should monitor this development and be prepared to for increased scrutiny regarding the classification of their workforce.

If you have questions regarding the above or any other employment-related concerns, please contact Patrick Busch at (952) 921-4602 or pbusch@pklaborlaw.com, or any other attorney at Peters, Revnew, Kappenman & Anderson, P.A.