The Department of Labor’s Wage and Hour Division’s recently proposed regulation redefines how to classify employees and independent contractors under the Fair Labor Standards Act. Here’s what businesses across industries need to know.
Imagine if a powerful agency such as the U.S. Department of Labor decided to change its current policy in a way that threatened your ability to continue doing business. Now imagine that new policy was based on the premise that you really don’t know what’s good for you or in your own best interest.
This may seem like a conspiracy theory – but this is actually the impact and reasoning of the Department of Labor’s Wage and Hour Division’s recently proposed regulation (NPRM) redefining how to classify employees and independent contractors under the Fair Labor Standards Act. When most people think of independent contractors (ICs), they picture individuals operating in the “gig” economy, such as drivers for Uber and Lyft. However, while those workers will certainly come under scrutiny, the independent contractor model is used successfully in a wide variety of industries where it benefits both parties—companies are able to scale operations up or down or retain expertise as needed, and ICs have flexibility and control of their work activities.
Released on October 13, the proposed regulation does several things:
- It repeals the current regulation issued by the Trump administration in 2021, which has only been in effect for a few months.
- It reinstates the “traditional” economic realities test.
- It provides examples and discussion around DOL’s view of each factor of the test.
The overarching thrust of the NPRM is determining whether a worker is “economically dependent” on an employer for work and thus an employee, or in business for her/ himself. Economic dependence is an elusive concept that in some cases may end up being defined by the eyes of the beholder—such as a Wage and Hour auditor.
The NPRM relies on a “totality of the circumstances” analysis where there is no pre-determined weight or degree of importance given to any of the factors in the seven factor economic realities test. This contrasts with the Trump administration regulation that the NPRM seeks to repeal, which established two factors as the most important—control of the work, and opportunity for profit and loss. The seven factors listed in the proposal are: opportunity for profit or loss based on managerial skill; investments by the worker and employer; degree of permanence of the relationship; nature and degree of control; extent to which the work performed is an integral part of the employer’s business; skill and initiative; other factors. The full description of each factor can be found here.
By using an unweighted, “totality of the circumstances” approach, the NPRM provides little guidance as to how workers and businesses should apply those factors when they do not all point in the same direction. This will leave businesses and workers unclear as to how to properly classify a worker, with the exception that if a business classifies a worker as an employee that decision will never be second guessed by the Wage and Hour Division.
The Department is convinced that this proposal will not result “in these workers being reclassified as employees. Especially compared to the guidance that was in effect before the 2021 IC Rule, the test proposed in this NPRM would not make independent contractor status significantly less likely.” Unfortunately, because of the way the different criteria are described, there is little reason to be so confident that this proposal would not lead to upheaval of many current legitimate independent contractor relationships.
The proposed regulation redefining how to classify workers as either independent contractors or employees is one of the most impactful regulations ever issued by the Wage and Hour Division. The U.S. Chamber will be submitting comments expressing our strong concerns with this proposal.