A Proposed Rule Could Make Classification of Independent Contractors More Challenging

Iris Lozano

Last week, the U.S. Department of Labor (DOL) officially published its Notice of Proposed Rulemaking (NPRM) to address how it will determine whether a worker is classified as an independent contractor under the Fair Labor Standards Act (FLSA). This proposed rule, while seemingly similar to previous guidance, would establish nuances that will make it decidedly harder for employers to classify workers (or subcontractors) as independent contractors. This classification of workers as independent contractors or employees is critically important to employers because it determines whether a worker is subject to federal minimum wage and overtime requirements. And, while the DOL has no statutory authority to govern or bind the courts, judges are generally required to give some degree of deference to the DOL’s rules.

Federal appellate courts have been generally uniform as to what general factors play into the classification of an independent contractor. Those factors include: (i) the worker’s independent opportunity for profit or loss; (ii) the amount or degree of investment made by the worker; (iii) the permanency of the work; (iv) the degree of skill and initiative required to complete the work; (v) the degree of control by the employer over the worker; and (vi) whether the work is an integral part of the employer’s business. The essence of an independent contractor classification comes down to how the factors are framed and/or defined, how the factors are weighted on an individual basis, and how the factors define “economic independence” for a worker.

The current Trump-era rule, which this proposed rule seeks to supplant, applies an “economic reality” test to these various factors, focusing mainly on two “core factors” – the nature and degree of control over the work and the worker’s opportunity for profit and loss. If these two core factors point toward the same classification, according to the Trump rule, there is a “substantial likelihood” that it is the worker’s accurate classification. That rule also provides that the actual practice of the parties involved is more relevant than what may be contractually or theoretically possible. In practical terms, the Trump rule makes it easier for employers to properly classify their workers and allows for greater employer flexibility to create contractor relationships.

The DOL’s proposed rule seeks to revert to a previous DOL paradigm that focuses on the concept of worker “economic dependence.” The DOL reasons that the more a worker depends on a particular company for their economic survival, the less likely it is that the worker is an employee and not a contractor. To facilitate this concept, the proposed rule re-implements a “totality-of-the-circumstances” test to the worker classification equation. This approach rejects the notion that any single classification factor should have a predetermined weight and instead considers the “whole activity” by applying full consideration to each factor and, in some cases, considering other, undefined factors. Thus, no single factor or combination of factors would be dispositive, and an analysis of individual circumstances may weigh one factor more or less heavily than in other cases. This will make it far more difficult for employers to predict whether a worker is properly classified under the FLSA.

Additionally, while the NPRM lists the seemingly familiar classification factors to be considered, the DOL has broadened each factor in favor of employment status at the expense of contractor arrangements. For example, the NPRM seeks to narrow the “investments by the worker and employer” factor. This factor asks whether a worker’s personal investment in the work augurs toward contractor status. Under the Trump rule, the amounts and types of investments are considered but do not constitute a core indicator of independent contract status.  Under the NPRM, investment by a worker is defined as a standalone factor, suggesting that, absent a worker’s material investment in their business, employee status is more likely. Particularly concerning in this regard, the NPRM states, “The use of a personal vehicle that the worker already owns to perform work— or that the worker leases as required by the employer to perform work—is generally not an investment that is capital or entrepreneurial in nature.” This appears to be a shot at gig worker arrangements. The NPRM also bizarrely engrafts onto this factor a financial equivalency element, stating, “If the worker’s investment does not compare favorably to the employer’s investment, then that fact suggests that the worker is economically dependent and an employee of the employer.”

There is, of course, much more. The NPRM addresses each contractor factor, infusing new definitions in the factors themselves as well as their interpretive value. Thus, while the NPRM may appear to simply revert to the long-standing economic realities test that existed prior to the Trump rule, it actually expands the scope of that test in a manner at odds with contractor relationships. The NPRM will now continue through the process necessary to become an actual regulation, while several stakeholders have already petitioned the DOL to provide more time to consider and comment on the regulation.

If you have any questions about the proposed rule or any other L&E matters, contact your Sherman & Howard attorney.