U.S. Department of Labor Proposes Rule Revising the Guidance for Classifying Workers as Employees or Independent Contractors under the Federal Labor Standards Act

By: Cameron Baker, Associate Attorney 

Today, the U.S. Department of Labor (“DOL”) published proposed rules[1] that would set new guidelines for properly classifying whether certain workers are “employees” or “independent contractors” under the Fair Labor Standards Act (“FLSA” or the “Act”). Per the DOL, employee misclassifications can strip workers of rights and protections granted under the Act and give noncompliant businesses an unfair advantage over other competitors that properly classify workers under the law.

The DOL considers misclassification to be a major issue in the workforce and economy, and this concern gained attention at the height of the COVID-19 pandemic when thousands of essential workers were misclassified as independent contractors and suffered from the resulting denial of FLSA protections granted to employees. The DOL stated in a press release that misclassification “deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages.”[2]    

The proposed rule would reinstate the more holistic “economic reality” factor analysis, based on a totality of the circumstances as opposed to granting particular weight to certain factors.  Specifically, the factors assessed are (1) whether a worker controls their opportunity for profit or loss; (2) the extent of a worker’s investments; (3) the work relationship’s degree of permanence; (4) the extent of the employer’s control over the worker’s schedule; (5) the degree to which the work is integral to the employer’s business; and (6) the degree of skill and initiative of the worker.

  The current rule, the 2021 Independent Contractor Rule (“IC Rule”), places greater weight on the (1) worker’s control of opportunity for profit or loss, and (4) control over the work.  The DOL “believes that retaining the 2021 IC Rule would have a confusing and disruptive effect on workers and businesses alike” because it departs from the purpose of the FLSA, and courts have consistently applied the “economic reality” factors under a totality of the circumstances analysis.[3]  

Due to the IC Rule’s perceived discrepancies with legal precedent and federal law, the DOL moved to rescind the Rule and restore the “economic reality” analysis test, believing it will “provide more consistent guidance to employers” in determining whether workers are dependent on the employer and help workers in identifying whether they have been correctly classified as an employee or an independent contractor.[4]

Employers should closely monitor the rule proposal and implement proper procedures for the classification of workers if the rule is implemented or face potential penalties for misclassification.  Employers are encouraged to participate in the rulemaking process and can submit comments on the rule proposal from October 13 to November 28, 2022 at the following link: https://www.dol.gov/regulations. 

[1] Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 87 FR 62218-01, available at https://www.federalregister.gov/documents/2022/10/13/2022-21454/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act (last visited October 13, 2022).

[2] See October 11, 2022 U.S. Department of Labor News Release, available at https://www.dol.gov/newsroom/releases/WHD/WHD20221011-0 (last visited October 13, 2022).

[3] See supra, n.1, at § I.

[4] Id.