As the U.S. Department of Labor (DOL) prepares to publish a new proposed rule on how individuals can be classified, employers are being warned to expect a tougher time justifying an independent contractor classification.
The DOL will publish a Notice of Proposed Rulemaking on October 13 aimed at clarifying how workers can be classified under the Fair Labor Standards Act (FLSA).
The announcement of the new proposed rule is the latest in a series of actions the DOL has taken over the years to settle when workers can legally be classified as independent contractors instead of employees.
The DOL said the new proposed rule would tackle worker misclassification while preserving essential worker rights and providing consistency for regulated entities. The agency also says the rule is consistent with longstanding judicial precedent.
Meaning for Employers
Catherine F. Burgett, an attorney with Frost Brown Todd LLC in Columbus, Ohio, says employers need to recognize the proposed rule will make it harder to classify certain workers as independent contractors, but it doesn’t go as far as some feared it would.
The proposed rule would replace the current rule, which took effect in 2021. If finalized, the new rule will give employers and workers more to consider since it “took away some of the clarity and definite nature of the 2021 rule,” Burgett says.
Even with the change, her advice to employers remains the same. She stresses employers need to take great care in verifying their independent contractor relationships work under the law.
“For as long as we’ve been beating on the drum of ‘Don’t misclassify workers,’ I consistently, every year, have employers and individuals who believe they can have independent contractors just by saying so,” Burgett says. “If I had five wishes, one would be to help people understand just saying it does not make it so.”
Timothy M. Threadgill, an attorney with Butler Snow LLP in Jackson, Mississippi, says the proposed rule, if finalized, will substantially change the climate.
Under the rule put in place during the Trump administration, “I believe most independent contractors would have remained such,” Threadgill says, “Under this rule, I believe many independent contractors will be reclassified as employees.”
Threadgill says he believes the proposed rule will upset many gig economy workers as well as other independent contractors since they may lose the flexibility they enjoy as contractors if they’re reclassified as employees.
Burton J. Fishman, an attorney with FortneyScott in Washington, D.C., says the proposed rule is essentially a return to the Obama administration’s rule, and it differs quite a bit from the current rule.
“The examples all indicate that the trend is to employment status,” Fishman says, but he thinks it is aimed at the gig economy.
“Many independent contractors today will likely not notice anything,” Fishman says, adding that he thinks the litigation will focus on companies like Uber, DoorDash, TaskRabbit, and others, and the examples included in the proposed rule indicate that the DOL believes those kinds of companies to be employers of employees, not independent contractors.
In announcing the proposed rule, the DOL said it would align its approach with the “economic reality test,” which refers to factors such as the investment, control, and opportunity for profit or loss by the worker.
The proposed rule also would restore the multifactor “totality of the circumstances” analysis to determine whether a worker is an employee or a contractor under the FLSA.
Some History
The current rule, issued in the waning days of the Trump administration, would have made independent contractor status easier to justify under the FLSA. It was issued just a few weeks before the Biden administration began in January 2021 and wasn’t scheduled to take effect until March 2021.
The new administration first delayed and then withdrew the rule before its effective date, but it was reinstated after a Texas U.S. district court heard a lawsuit challenging the Biden administration’s efforts to delay and withdraw the rule.
Some had thought a new rule from the Biden administration would include what’s called the “ABC test,” which makes independent contractor status more difficult to justify. But the new proposed rule states the DOL “believes it is legally constrained from adopting an ABC test because the Supreme Court has held that the economic reality test is the applicable standard for determining workers’ classification under the FLSA as an employee or independent contractor.”
Under the ABC test, a worker is considered an employee instead of an independent contractor unless all three of the following conditions are met. The worker must:
- Be free from the company’s control and direction in connection with the performance of the work;
- Perform work that is outside the usual course of the hiring entity’s business; and
- Be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
The ABC test differs from the economic realities test since it considers the three specific circumstances instead of the totality of the circumstances of the relationship between the employer and the worker. Also, the ABC test doesn’t balance the three parts, instead requiring all three be met to allow a worker to be classified an independent contractor.
Other Agencies Weigh In
Even after a new rule from the DOL is in place, employers will have more to consider since the IRS, the National Labor Relations Board (NLRB), and state governments also weigh in on when workers can properly be classified as independent contractors.
The NLRB has said it is planning its own rule on how workers can be classified under the National Labor Relations Act. The IRS decides who qualifies as an independent contractor under the Internal Revenue Code, and states often set their own rules on the matter.
Tammy Binford is a Contributing Editor at HR Daily Advisor.