DOL Proposes to Rescind and Replace FLSA Independent Contractor Regulations

The DOL’s Wage and Hour Division (WHD) has proposed new regulations for determining whether a worker is classified as an employee or an independent contractor for purposes of the Fair Labor Standards Act (FLSA). Among other things, the FLSA governs minimum wage and overtime requirements that apply to employees but not independent contractors. The proposed regulations would rescind and replace regulations issued in 2021. The 2021 regulations were previously frozen, delayed, and withdrawn, but a court vacated the withdrawal and held that the regulations were effective (see our Checkpoint article).

According to the DOL, the proposed regulations are intended to provide a framework for analyzing independent contractor status that is “more consistent with longstanding judicial precedent” than the approach in the 2021 regulations, which did not comport with the FLSA’s text and departed from decades of case law. The proposed regulations would restore a “totality-of-the-circumstances” approach in assessing the economic reality of the working relationship, requiring balanced consideration of six factors, rather than giving greater weight to two “core” factors as in the 2021 regulations. The six factors are the worker’s opportunity for profit or loss due to managerial skill, investments by the parties, the relationship’s permanency, the nature and degree of control over the work, whether the work is an integral part of employer’s business, and skill and initiative. Other factors may also be relevant. The DOL explains in the preamble that ultimately, individuals who are economically dependent on the employer for work are employees, and those that are in business for themselves are independent contractors.

EBIA Comment: While changes to the FLSA’s independent contractor analysis could be significant for many businesses and workers, most employee benefit plan rules determine employee status under ERISA or the Code (not the FLSA), often in conjunction with the common-law standard. It is important to properly classify workers under the appropriate set of rules—particularly for purposes of the Code’s rules regarding retirement plans, cafeteria plans, and employer shared responsibility penalties. For more information, see EBIA’s Health Care Reform manual at Sections XXI.E.3.a (“Exchange Notice: Who Is an Employee for FLSA Purposes?”) and XXVIII.C (“Penalty Tax Hinges on Whether Employer Offers Coverage to Full-Time Employees”). See also EBIA’s ERISA Compliance manual at Section IX.I (“Eligibility Issues Involving Independent Contractors, Leased Employees, and Others”); EBIA’s Cafeteria Plans manual at Section IX (“Who Can Participate in a Cafeteria Plan?”); EBIA’s Self-Insured Health Plans manual at Section XIV.C (“Which Employees and Other Workers Will Be Allowed to Participate?”); and EBIA’s 401(k) Plans manual at Section VII.B (“Eligibility Condition #1: Participation Limited to Common-Law Employees, Partners and Sole Proprietors, Some Leased and Statutory Employees”).

Contributing Editors: EBIA Staff.