The U.S. Department of Labor (DOL) has published a proposed rule to revise the Department’s guidance on how to determine who is an employee or independent contractor under the Fair Labor Standards Act (FLSA) (Federal Register 2022-21454, published on 10/13/2022).
Proposed rule would rescind current rule.
The DOL explains that the Notice of Proposed Rulemaking (NPRM) would rescind an earlier rule on this topic that was published on January 7, 2021, and replace it with an analysis for determining employee or independent contractor status that is more consistent with the FLSA as interpreted by longstanding judicial precedent.
On January 6, 2021, the DOL under the prior Presidential Administration issued a final rule addressing the distinction between employees and independent contractors under the FLSA, which emphasized the use of two core factors of the economic realities test (the 2021 rule). Those two core factors are: (1) the nature and degree of the worker’s control over the work, and (2) the worker’s opportunity for profit or loss based on initiative and/or investment. These two core factors weighed greater than other considerations. Opponents argued that the 2021 rule ran counter to established court rulings on the matter. The effective date of the 2021 rule was March 8, 2021. The DOL under the current Presidential Administration issued rules in 2021 to delay and withdraw the rule, which were vacated by a federal district court on March 14, 2022. Currently, the two factor economic reality rule remains in effect.
Announcement of proposed rulemaking.
On June 3, 2022, the DOL announced it is developing a proposed rule on determining employee or independent contractor status under the FLSA and held forums in June 2022 to hear perspectives from those who may be affected by employee or independent contractor classification.
The DOL has said that its proposed rule would reduce the risk that employees are misclassified as independent contractors, while providing added certainty for businesses that engage (or wish to engage) with individuals who are in business for themselves.
The DOL said that it issued the proposed rule because it believes that the worker classification rule from 2021 does not fully comport with the FLSA’s text and purpose as interpreted by courts and departs from decades of case law applying the economic reality test. The DOL said its proposed rule is not using “core factors” but instead aims to return to a totality-of-the circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.
Proposed 29 CFR § 795.110 provides multiple economic realities factors to be considered when determining worker status. The DOL notes that the list is not exhaustive and no single factor is dispositive. These factors are:
- Whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work.
- Whether any investments by a worker are capital or entrepreneurial in nature.
- Degree of permanence of the work relationship and weigh whether the work relationship is indefinite in duration or continuous (in favor of employee) or nonexclusive, project-based, or sporadic (in favor of independent contractor).
- Nature and degree of control, including reserved control, over the performance of the work and the economic aspects of the working relationship.
- Whether the work performed is an integral part of the employer’s business.
- Whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative.
- Any additional relevant factors may be considered.
The DOL is further proposing to return the consideration of investment to a standalone factor, provide additional analysis of the control factor (including detailed discussions of how scheduling, supervision, price-setting, and the ability to work for others should be considered), and return to the longstanding interpretation of the integral factor, which considers whether the work is integral to the employer’s business.
While the rules just refer to wage and hour issues under the FLSA, it would appear that if the DOL rules cause a worker to be classified as an employee, then all subsequent payments to the employee would also be subject to IRS payroll tax withholding.
Interested parties can submit comments on the proposal by November 28, 2022. The procedures for submitting comments can be found at Federalregister.gov.
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